Special Series: Potential Alternatives To Managing Insurance Risks - Part Three
August 25, 2021
by Tonya DeRivi
August 25, 2021
Historically we have seen the insurance market cycle from either being competitive with few utilities seeing coverage problems, or “tight” as we explained earlier and see now. The American Public Power Association concludes our three-part insurance risk series by exploring ways in which public power utilities have sought, or could seek, alternatives to the increasingly limited availability and expense associated with traditional individualized commercial insurance options.
One model that has been successfully used is “pooling” insurance coverage across multiple entities. This is common practice across state and local governmental entities – but it necessarily covers a broader spectrum of services, from police and fire to libraries and public utilities, and therefore may not offer industry-specific coverage that high-risk enterprises may need. Fortunately, this model can also be tailored to a specific industry – provided there is the capital available and know-how to do so.
Nearly four decades ago, some public power utilities in the Tennessee Valley found themselves in an untenable position: some had no options to buy liability insurance – at any price, according to Anthony Salvatore, an area senior vice president with Gallagher.
The Tennessee Valley Public Power Association (TVPPA) – a regional organization representing public power utilities within the Tennessee Valley Authority’s (TVA) multi-state service area – set out to fix that problem. They formed Distributors Insurance Company (DIC) in 1983 with a small amount of start-up cash and a $1 million letter of credit backed by TVA. Its goal was to make coverage available to all TVPPA members, tailor coverage to exposures unique to public power utilities, and to do so at competitive pricing. In the beginning, DIC had three member accounts with approximately $200,000 in total premium. Their portfolio has grown astronomically since: DIC now has 80 accounts with approximately $40 million in assets and $26 million in surplus. They spend a large amount on safety and loss control efforts, mission-critical endeavors specifically designed to help participating members.
Today’s insurance market issues – especially given what is happening in California – are not easily solved. “California is an incredibly difficult state for insurance companies; it’s not easy to do business in, it’s expensive, and there are problems there that the insurance industry simply cannot fix. These are issues that the state needs to address,” Salvatore said. “The wildfire situation has spooked the entire insurance industry to the point where liability and property insurance capacity has almost entirely dried up. We’ve even seen some of this reactivity from the Western states spread to our area here in the Southeast” he noted. “The market overall is very tight and has been tightening for many years. Then the pandemic pushed everyone over the edge.”
Indeed, one California-based public power utility saw their general liability rate increase 111% with their 2021 policy renewal, further indicative of how wildfire exposure is driving liability coverage and pricing. The insurance carrier has already said they will not offer a renewal in 2022. This utility also saw its total premiums for all lines of coverage nearly double over the last three years, with increasingly restrictive coverages. One of their insurance carriers has already said they may not offer a property insurance renewal in 2022.
What, then, could public power utilities do in this hardening insurance market?
We spoke with Washington, D.C.-based Arnold & Porter lawyers Charles Landgraf and Paul Howard to explore options. Together they have nearly 60 years of pertinent energy and insurance policy experience.
The “pooling” model described above has worked for decades. Forming a model like DIC or the Public Utility Mutual Insurance Company (now a risk retention group) or Aegis (which provides liability and property coverage to mainly investor-owned utilities in the energy industry) would first require conducting a feasibility study, according to Landgraf.
Actuaries would conduct an actuarial study to explore allocations, lawyers would be needed to identify and work through issues, it would have to identify who could serve in the captive manager function – whether for one state, multiple states in a region, or nationally – and then work with brokers and deliver the necessary capital. The more narrowly it is applied, the easier the issues are to work through. Landgraf also noted that while a study exploring only one state’s regulatory law and liability systems would be easier, that also reduces the spread of risk and therefore limits the competitive pricing advantages of the pooling model.
Howard added that the federal Risk Retention Act is relevant because it allows a group captive manager to go national; an entity could be formed in one state to sell insurance to local public power utilities, for example, and then sell or “front” to public power utilities in other states without the added burden of becoming licensed in each state. This offers a nice tool as a multi-state solution – but is limited only to liability lines of business.
They estimated that such a study may cost anywhere from the low six-figures, for a limited regional approach, or high six-figures for a national feasibility study.
Landgraf and Howard suggested there may be intermediate steps public power utilities could take too.
“If this became an acute enough problem for state governments in the West, for example, you could in theory work to develop a multi-state compact,” Howard said. Community-owned utilities may carry a much more sympathetic message to relevant state leaders – namely, their governors and insurance commissioners – seeking regulatory relief through a mini risk retention policy model. Politically like-minded state leaders could work together to reach a mutual agreement allowing public power utilities to pool their capacity for self-insurance and to leverage access to global reinsurance. Landgraf explained that having the backing of state leaders through an interstate agreement to simplify and streamline regulations could, for example, allow a single entity to be domiciled and licensed in one state and serve the other states too.
“This may be something the Pacific Rim states could explore” given their like-minded politics and prior efforts by state leaders to work through climate change policies together, Landgraf said. Similarly, other like-minded states in a region could explore such interstate agreements to help their public power utilities navigate this increasingly difficult insurance market.
Landgraf noted that the insurance industry itself may be inclined to explore such efforts. “They are acutely aware of the different regional impacts climate change is having,” he said. The situation may be acute enough now that a mutual effort to work through region-specific solutions is primed. There is credibility on all sides: the insurance companies would want to help public power utilities create an insurance solution they could support, provided that the states work through existing regulatory problems, like multi-state licensing rules and to simplify regulatory hurdles; state leaders have seen first-hand the resulting damages of a changing climate and that more needs to be done to incentivize preventive measures within their own and nearby states; and publicly-owned utilities need affordable insurance solutions.
Another challenge with seeking multi-state relief is political. One must also consider that agreement across states in this arena involves elected governors and elected or appointed insurance commissioners, Howard added.
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