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Purchasing municipal insurance more effectively.

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 always worth the effort.

Bids vs. Proposals

Strictly speaking, a "bid" deals only with the issue of price. Some municipalities may be required by statute to accept only bids, in this strict sense of the term, for particular services, including insurance. In such cases, a municipality will be required to define in precise detail the extent and nature of the insurance coverage it is seeking. The insurance carriers will be required to submit a bid only on that specific coverage, and the municipality will be required to accept the lowest bid, assuming that the carrier meets certain other requirements, such as assets of sufficient size and perhaps a proven record of providing service to municipal clients.

In the broader sense used in this article, "bidding one's insurance" refers to the process of obtaining proposals in which the insurance carrier is allowed to put forth its best possible package of coverage and price, again so long as it meets the basic guidelines prescribed by the municipality. This approach allows the municipality greater flexibility in making its decision, enabling it, for example, to choose a slightly more costly package in order to obtain superior coverage or service.

Given the complexity of any insurance package and the variety of possible combinations of coverages and retention levels, and given the inherently competitive nature of the insurance industry, it is generally advisable to choose the more flexible approach of soliciting proposals--to "bid the insurance" in the broader sense of the term.

While competition is healthy, it is also true that the bidding process requires a commitment of time and energy on the municipality's part. Thus, reasonable practice is to bid the municipality's insurance every three to five years, unless a carrier requests what appears to be an unreasonable increase in premium or restriction in coverage, or unless general market conditions suggest that considerable savings may be possible. In 1991, for example, the introduction of an aggressive new carrier into the municipal insurance market in Massachusetts enabled many cities and towns to reduce their premiums by very significant amounts--in some cases by more than 50 percent. Exhibit 1 sets forth an optimum time table for seeking competitive proposals.

The Bidding Process: Step By Step

1. Identify coverage needs. A full discussion of how to analyze a municipality's insurance needs is beyond the scope of this article. The place to start, however, is the existing coverage, which should be reviewed carefully to see if conditions have changed since the insurance was purchased. Also, a variety of standard lists and questionnaires are available, often from state insurance bureaus or the carriers themselves, to help in risk identification. Both the existing coverages and lists of possible risks should be reviewed by all department heads in order to obtain the most up-to-date and complete assessment of the municipality's insurance needs.

2. Prequalify the agents who will participate in the bidding process. Prequalifying the agents and brokers who will be permitted to participate in the bidding process insures that all the major municipal carriers will be solicited. Prequalification also insures that the agent or broker who eventually services the municipality's account is qualified to do so. And finally, it reduces the time and effort involved in reviewing obviously inadequate proposals.

In its prequalification package, the municipality should specify in detail the minimum criteria for participation in the bidding process. For example, an agency should have at least two full-time staff members holding valid brokers licenses in that state; the account executive assigned to the municipality should be available to meet with municipal officials days or nights as required; and the agency should have sufficient support staff and facilities. The municipality also should require each agency to list the carriers it intends to approach for bids. For each of those carriers, the agency should indicate how much insurance it obtains from the carrier and with what loss ratio, how many years the agency has represented the carrier, any incentives the agency receives from the carrier, whether the agency has direct computer links to the carrier and whether the agency has underwriting authority with each carrier.

The prequalification package also should include a step-by-step outline of the request for proposal (RFP) process and procedures. This will help assure all interested parties that the process will be fair and evenhanded.

Public notice of an RFP should be posted in a conspicuous place at the municipal offices and published in appropriate local newspapers and other publications. Notices also should be sent to incumbent agents and brokers, and to any other agents and brokers who have recently expressed interest in the municipality's business or who might be qualified. The prequalification package should then be sent to all interested parties with a firm date by which the appropriate information should be returned. interested agents and brokers also should be strictly prohibited from approaching any carrier until notified to do so.

Once the prequalification information has been received and evaluated, the participating agencies--ideally, three to five--should be selected. The municipality should then inform each participating agency which carriers to approach on the municipality's behalf. Insurance companies operate on the principle that the first agent or broker to approach a carrier on behalf of a prospect is the only agent or broker allowed to do so. Given the importance of the agent-underwriter relationship to the bidding process, it is clearly in a municipality's interests to decide which agent or broker should make that first and final presentation to a particular carrier. This market-assignment procedure may not be popular with agents and brokers, but it is crucial if optimal market penetration is to be achieved.

Regardless of how carefully the RFP has been prepared--a subject dealt with in detail in the next section--the participants in the bidding process are likely to have questions. They also are likely to ask for an inspection tour of the municipality. To minimize the time involved in meeting these quite legitimate requests, it is helpful to indicate in the RFP that all requests for further information should be submitted in writing by a certain date. The municipality can then answer all questions in a single document mailed to all the participants. Similarly, a day and time should be set aside by the city or town for tours and the participants invited to attend.

3. Prepare an RFP that produces the results desired. The RFP must of course specify all submission requirements, including dates and any forms which must be used. It should also describe in detail the coverages, limits, deductibles and service requirements that the municipality wishes to obtain, including the minimum standards for acceptability in all areas.

The RFP also should provide all the information an underwriter will need in order to prepare the best possible proposal. It is important to remember that an underwriter is likely to be dealing with RFPs from dozens of municipalities at the same time. Those RFPs that make the job easier are likely to receive better treatment. With this in mind the RFP should include:

* a payroll schedule, including a brief description of each job classification and corresponding payroll amounts;

* an automobile schedule, including cost of each vehicle when new, gross vehicle weight for larger vehicles, place of garaging and even the general travel radius for each vehicle; and

* a property schedule, including area, building and contents value, and construction information, such as the number of stories and whether or not the building has a sprinkler system.

Most insurance companies have adopted the use of "ratable expenditures" as the basis of general liability premiums for municipalities. Essentially, these ratable expenditures represent what is left of a municipality's operating expenditures after removing items which are not covered by general liability insurance or separately rated. These "deductions" include monies paid to independent contractors and expenditures for welfare benefits, schools, medical care facilities, penal facilities, transportation facilities and systems, utilities, police, housing projects and a number of other items.

Before preparing an RFP, the municipality should obtain a form called an "Expenditure Worksheet for Governmental Subdivisions" from several carriers, and use these to prepare its own version. This worksheet should be carefully filled out with the appropriate financial information and included in the RFP. By making certain that all proper deductions are included, the municipality can insure the lowest possible general liability premium.

Some insurance companies will audit a municipality's ratable expenditures at the end of the policy period and adjust the premium retroactively if necessary. It is important to note that some carriers do not audit these figures. Since an audit will generally result in additional charges, a proposal that is not subject to audit should be looked upon more favorably.

In addition to the information necessary to compute the ratable expenditures, the RFP should include a variety of other statistical information which will help the underwriter understand the community's needs and circumstances. This information includes: population; area (in square miles); miles of streets and roads (town maintained and state maintained); cost of street and road maintenance; miles of sewers; water usage; employees (town and schools); school pupils; police officers; fire department personnel; ambulances and attendants; hospitals; medical professionals; public officials; revenues, expenditures and budgets for previous five years (town and schools); vacant land; and swimming pools and other recreational facilities.

Finally, the RFP should include a compliance guide, which is simply a detailed list of all the specifications, with columns set up to indicate compliance or noncompliance and premiums quoted. This document should be filled out by the agent. It will make the process of analyzing and evaluating proposals much easier and less time consuming for the municipality's insurance manager or committee.

Compiling these schedules and documents and making sure that the information they contain is accurate and complete requires considerable time and effort. The result, however, is a high-quality RFP, which in turn will generate high-quality proposals.

4. Compare apples to apples. Despite the precision of the specifications contained in a municipality's RFP, the resulting proposals will inevitably vary in terms of coverage, limits and deductible levels, as well as cost. In making a decision, it is necessary to consider questions such as the following.

* Which proposal seems closest to the ideal?

* Do the other proposals offer any desirable coverages not included in the "top" proposal? (Coverage for streets and roads or athletic participants, for example, often is excluded by some carriers and included by others.)

* Can these desirable coverages be obtained separately?

* If so, what does the cost of these additional coverages do to the overall and comparative cost of the top proposal?

* How does the cost of the additional coverage compare to the losses typically experienced by the municipality in these areas?

* Even if previous losses have been minimal, does the potential for catastrophic loss exist? If so, should the coverage be obtained, even at a relatively high cost?

Exhibits 2 and 3 illustrate how three proposals have been adjusted to provide a more accurate basis for comparison. In the case of nurses liability, the cost of obtaining such coverage separately was plugged into the two proposals which did not include it originally. In the case of streets and roads and athletic participants insurance, the town's loss history was used to estimate the value of such coverage.

The answers to the above questions often involve matters of judgment rather than fact. Suppose, for example, that an otherwise excellent proposal does not include coverage for floods--coverage which is available separately from another carrier at considerable expense. Suppose that although the town is situated within the flood plain of a major river, no flood has occurred for more than 25 years. In such a case, should the proposal be accepted as is, or should the expensive flood coverage be added, in order to protect against what is a minimal but potentially catastrophic risk?

In making such decisions, it is often wisest to accept less coverage (or higher deductibles, which amount to the same thing) for risks which produce highly predictable, noncatastrophic losses, and spend the money saved on premiums to protect the community against those less predictable but potentially more damaging losses. It should be noted, however, that TABULAR DATA OMITTED TABULAR DATA OMITTED higher deductibles will not always produce significant premium savings.

5. Try to fine tune the final package. In cases where a particular proposal seems generally preferable, a municipality should not hesitate to accept the proposal and then ask the underwriter to make adjustments. By changing the deductible levels, for example, or by adding additional coverage not originally proposed, the overall package may be made even more satisfactory. Surprisingly, most carriers are amenable to such fine-tuning; like any company doing business in a competitive market, they have at least some incentive in being responsive to their customers.


The market for municipal insurance undergoes periodic shifts in response to a variety of factors. During the late 1980s, for example, the market was characterized by high premiums and restricted coverage. More recently, the market has generally become more competitive, with coverage more easily obtainable at more reasonable rates.

In a competitive market environment, a municipality can obtain significant advantages by bidding its insurance on a regular basis. But even in a less favorable market, a well-planned and carefully implemented bidding procedure can keep premiums from rising excessively and insure that every possible dollar service is obtained.

KEVIN F. DONOGHUE is president of Kevin F. Donoghue & Associates, Boston, MA, an independent risk management consulting firm serving a wide variety of governmental, education and business clients across the nation. WESLEY B. ROWE, senior vice president of the firm, specializes in municipal insurance.
COPYRIGHT 1992 Government Finance Officers Association
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:competition in municipal insurance
Author:Donoghue, Kevin F.; Rowe, Wesley B.
Publication:Government Finance Review
Date:Oct 1, 1992
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