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Shared-Risk Insurance Pools for Transit Agencies: A Guide (2023)

Chapter: Appendix E - Common Objections to Municipal Shared-Risk Pools

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Suggested Citation:"Appendix E - Common Objections to Municipal Shared-Risk Pools." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Page 57
Page 58
Suggested Citation:"Appendix E - Common Objections to Municipal Shared-Risk Pools." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Page 58

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E-1   The following are common reasons for objecting to a shared-risk pool and the research team’s responses. “We share insurance limits and coverage under a commercial insurance “blanket” policy and see no reason to change.” Employing standard commercial insurance forms to cover exposures to risk of loss subjects the insured to hundreds of unintended terms, conditions, and exclusions limiting coverage. For a list of common insurance coverage gaps, see the International Risk Management Institute press release: IRMI Releases Complimentary List of 101 Common Coverage Gaps to Avoid, April 2014. https://www.irmi.com/about/press-releases/irmi-releases-complimentary-list-of -101-coverage-gaps-to-avoid. (May require registration for access.) By contrast, pool coverage documents are not subject to any terms, conditions, or exclusions unless specifically included, and are subject to contract law, not insurance law. The mere existence of an insurance policy creates no legal obligations. An insurance policy recites terms, conditions, exclusions, and other restrictions of coverage that do not attach to a particular person or item of interest and are subject to insurance law. Pool coverage documents function under contract law instead of insurance law, streamline claim resolutions, and reduce litigation costs. “Transit agencies do not want to lose control of the claims process and investigations.” This statement may have some validity for metropolitan operations. Still, only some urban and rural operations will have the staff or expertise to manage claims quickly and effectively. “For liability claims, a variety of analysts, including the global risk management firm Towers Watson, have produced studies that demonstrate that Pools have been able to resolve claims faster, and at a lower cost than commercial insurers data would predict” (Intergovernmental Risk Management Agency n.d.) “The data needed to compare a collection of transit agencies’ risks is too difficult to obtain and, therefore, is not collected.” The data required to test the viability of creating a shared-risk pool is readily available; it consists of copies of existing policies and copies of the materials submitted to commercial insurers to apply for and obtain existing coverage. “In the last 20 years, an attempt was made and failed, so there’s no appetite to try again.” Times have changed. “Today, Pools are the source of [sic] innovation public entities need to address continuing challenges in risk management, even as the insurance crisis has calmed. Pooling is best embodied in a Swedish proverb: the best place to find help is often at the end of your arm” (AGRiP 2012). There are tens of thousands of public entities in the United States. The Association of Government Risk Pools estimates that at least 80% of all public A P P E N D I X E Common Objections to Municipal Shared-Risk Pools

E-2 Shared-Risk Insurance Pools for Transit Agencies: A Guide entities participate in one or more risk pools. Pooling is prevalent in smaller and mid-size public entities because they derive especially powerful benefits from sharing risk through a pool. “No staff person is responsible for setting things up and getting things going.” Very little or no staffing is required to explore whether creating and operating a pool is a superior method of managing an organization’s risk of loss. If a decision is made to establish a pool, pool members would pay the costs for management and services. “Agencies did not want to share the risk of other agencies.” The main focus of pooling is spreading the cost of risk among all members. The more members a pool has, the wider the field to spread the risk. The result should be a lower cost per exposure unit with less contribution fluctuation. The advantages of sharing losses with others will be mysterious to some potential organizations. However, the objection is over- come by discussing the benefits and examples of successful pooling of risk addressed in Phase 1. “Agencies did not want to risk having their premiums increase.” Risk-sharing pools have proven to reduce premiums (see Phase 1). Because of under writing risk, the individual pool member will pay more or less contribution to the pool than it incurs in losses during one period. However, the greater the number of pool participants, the more predictable the losses being paid by the pool will become, and the more closely the contribution paid to the pool will correspond with the actual loss cost of the individual pool member over time. So, the greater the number of individual members that make up the risk pool, the more credible the loss projections and the more equitable the sharing of the cost of risk for all members. Municipal pools have demonstrated that they significantly lower members’ total cost of risk over time, as illustrated in Table 3.

Next: Appendix F - Challenges Facing Municipal Shared-Risk Pools »
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Transit agencies are finding it increasingly difficult to find, purchase, and maintain adequate and affordable insurance coverage for public transit vehicles. The number of smaller insurance providers is decreasing due to the volatile nature and demands of the insurance industry and insurance coverage requirements in general.

NCHRP Research Report 1079: Shared-Risk Insurance Pools for Transit Agencies: A Guide, from TRB's National Cooperative Highway Research Program, explains how insurance pools function, how to evaluate the feasibility of a shared-risk insurance pool, and how to establish and manage this type of pool.

Supplemental to report is a presentation and NCHRP Web-Only Document 374: Developing a Guide to Shared-Risk Insurance Pools for Transit Agencies: Conduct of Research Report.

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