A.M. Best Special Report: Self-Insurance Pools and Trusts Banding Together to Share Risks.

OLDWICK, N.J. -- Self-insurance pools interactively rated by A.M. Best Co. bear out the effectiveness of the stringent entrance requirements of members, focused loss-mitigation activities, and ownership interest in both the loss exposure and frictional expenses of these entities, according to a special report released by A.M. Best.

A.M. Best has performed a quantitative and qualitative analysis on a group of 16 self-insurance pools and trusts that have met the stringent requirements necessary to obtain an A.M Best rating. The results of this study are based on the latest five years of reported financial data and operating information from these organizations.

Self-insurance pools are alternative risk-transfer vehicles that are organized primarily to meet the risk-mitigation needs of members. These members are bound together by similar risk profiles and an interest in reducing claim frequency and aggressively mitigating those losses that do occur.

The combination of at-risk member capital, as well as joint and several liability, is a strong incentive to control losses, minimize frictional expenses, and detect and control fraud. These factors benefit the results, with the five-year average loss and loss-adjustment-expense ratio for rated self-insurance pools at 60.6, vs. 89.3 for captives and 80.8 for A.M. Best's commercial casualty insurance industry composite. The five-year average underwriting expense ratio of self-insurance pools, which is 23.6, is above the comparative 19.4 for captives, but compares favorably with the 28.0 underwriting expense ratio of the commercial casualty insurance industry composite. Overall, the five-year average combined ratio after policyholder dividends of 95.0 for self-insurance pools compares favorably with the 116.9 of captives and the 109.9 of the commercial casualty insurance industry composite.

The substantial growth of membership in self-insurance pools is evidence of the desire to gain control over the product, particularly policy terms, and to stabilize premium to the maximum extent possible. Although the pools likely will be affected to some degree over the next few years as the commercial insurance market softens, the management teams operating the pools are confident that most of their members are committed to the long-term stability of their self-insurance programs and the benefits they derive from their participation in them.

Aggregated, the 16 entities analyzed wrote $686 million of net premiums for the year ended Dec. 31, 2003. Surplus for the same population and period was $630 million, and total admitted assets were $1.8 billion. The smallest entity analyzed had surplus of $7 million at year-end 2003, and the largest had surplus of $99 million for the same period. Membership ranged from as few as 20 members to as many as 7,700. Net premiums written ranged from a low of $8 million for 2003 to a high of $129 million for the same period.

Aggregated net written premiums grew almost 95% over the four-year period ended Dec. 31, 2003, while surplus grew 70% for the same period.

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A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at http://www.ambest.com.