Purchasing municipal insurance more effectively.

• Author: Donoghue, Kevin F.
• Position: Competition in municipal insurance

By regularly obtaining insurance proposals from a variety of agents and carriers, a municipality can stimulate a more open and spirited competition. The result is almost always worth the effort.

Every municipality is exposed to possible loss resulting from the disappearance, damage or destruction of municipal property or the property of individual citizens; from injury to municipal employees or citizens; from dishonesty; and from unforeseen liabilities imposed by state or federal law or assumed by contract. While every possible step should be taken to minimize these risks, some losses will inevitably occur.

A municipality can fund its losses directly, through a line item in the budget or a loss fund. Either of these funding mechanisms can be implemented through the use of insurance deductibles or a formal self-insurance program.

To the extent that its financial resources will allow, it is preferable for a municipality to pay for its own losses directly, and thus avoid paying the insurance carrier's overhead and profits. This means that a larger community will often purchase less insurance than its small neighbors, because the larger community's larger financial base allows it to withstand a larger loss.

While it may seem obvious that a community should insure only losses which it cannot fund through its own resources, the fact is that many communities, large and small, regularly purchase more insurance coverage than they actually need. Thus, one of the best ways to save on insurance costs is to take a hard look at the feasibility of retaining more risk, either by not buying coverage or by increasing deductible levels.

Most communities, however, still will require some amount of insurance coverage, if only to protect against catastrophic loss. The goal then becomes to obtain the necessary protection at the lowest possible cost. How to accomplish this not-so-easy objective is the focus of this article.

Competitive Bidding

Submitting its insurance program to competitive bidding on a regular basis is the best way for a city or town to minimize costs without sacrificing coverage or service.

In theory, most municipal managers would probably agree with such a policy. In practice, many municipalities choose not to obtain competitive bids or proposals for their insurance, at least not on a regular basis. Rather, they choose to rely on a particular insurance agent or broker who has, over time, provided satisfactory service. It is assumed that this service includes obtaining the necessary coverage at the lowest possible rates.

While this approach undoubtedly saves the time, energy and expense involved in planning and implementing an effective bidding process, it rarely produces optimal results. To some extent, the price of insurance coverage is determined by how much a carrier's underwriter wants that piece of business. The underwriter's perception is, itself, determined at least partly by how well the agent "sells" the client, i.e., the municipality. An agent will inevitably be more diligent and persuasive in making this presentation when the agent is actively competing with others. As a result, the underwriter is likely to price the coverage more competitively under these circumstances.

Another factor which makes the single-agent process less effective is that an incumbent agent will know, and inevitably divulge to the underwriters, the current pricing of the municipality's program. Given this information, an underwriter is likely to think in terms of, "What do I have to do to beat this price?" Without the current pricing information, and assuming the agent has made an effective presentation, the underwriter is likely to make a greater effort to generate the lowest possible premium.

Municipal insurance is a competitive product. By regularly obtaining proposals from a variety of agents and carriers, the municipality stimulates a more open and spirited competition. The result, in terms of cost, coverage and service, is almost...