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Local Government Property Insurance Fund
By Wisconsin School Administrators Alliance staff | March 30, 2015
The following WisPolitics news article regarding the future of the Local Government Property Insurance Fund was published on Friday, March 27th and includes quotes from the SAA.
MUNICIPALITIES MULL CREATION OF THEIR OWN PROPERTY INSURANCE FUND
The League of Wisconsin Municipalities is moving to fill the void that would be created if Gov. Scott Walker succeeds in axing a state-run property insurance program for local governments.
At the same time, Rep. Robert Brooks, R-Saukville, is piecing together an amendment that would support Walker’s proposal but keep the state program fully operational for two more years as long as the money coming in at least matches that going out.
Brooks and the league are on opposite sides of the debate over whether the state should be operating the program, called the Local Government Property Insurance Fund. But they agree on two points: The fund, if it continues at all, needs to increase its premiums, and, if it ends, the 982 government entities that buy property insurance from it need a relatively soft landing.
As of June 30, the fund had $51.9 billion of coverage in force.
But Walker’s budget proposal to discontinue the LGPIF comes on the heels of the fund’s collecting nearly $27.2 million in premiums in fiscal 2014 but finishing the year about $1.4 million in the hole. Advocates for independent insurance companies say the industry standard is for premiums and surplus to have at least a 1-to-1 ratio, meaning the fund, by those standards, should have finished ahead by at least $27 million to cover claims.
Under Walker’s proposal, the fund, run by the state Office of the Commissioner of Insurance, would not issue coverage as of July 1, would not renew existing insurance contracts after Dec. 31 and would not accept claims after July 1, 2017.
Of the approximately 600 cities and villages in the municipalities league, 343 buy property insurance from the fund, said Executive Director Jerry Deschane. The league — like the School Administrators Alliance, the Wisconsin Towns Association and others — opposes Walker’s proposal.
But it is not the first time the fund has been targeted, and Deschane said its unstable future and shaky financial structure has created uncertainty among members, who have stuck with the state program because its rates have been so low that the private market cannot compete.
“Plan A for us,” he said, “would be for the Legislature not to do away with a fund that’s been doing its job for a century.”
Still, the league took a big step toward pursuing plan B yesterday when its mutual insurance company’s board of directors continued planning for a possible expansion into property coverage. The league created the nonprofit insurance company around 1983, Deschane said, to offer cities and villages such coverage as liability and workers’ compensation insurance, but not property insurance.
Such an expansion, Deschane said, could give cities and villages a competitive option because even if the state fund survives, it cannot be the same.
“The fund has been losing money for the last few years,” he said. “That has to stop. That means rates for local governments have to go up no matter what happens.”
Brooks, who said he agrees with Walker “wholeheartedly” that the state should not be in the property insurance business, said the rate increase would be significant, though he added his amendment would not recommend a specific bump in premiums. He said the OCI is conducting an actuarial study to determine what it would take to keep the fund solvent but, based on his analysis, policyholders would face about a 39 percent increase in premiums.
He drew that conclusion after receiving from OCI the fund’s net premium collections and total operating expenses during several years. Between fiscal years 2010 and 2014, he said, premiums outpaced expenses only twice.
In the fund’s worst consecutive years, 2011 and 2012, Brooks said, it collected a combined $20.4 million in premiums and had expenses totaling $48.9 million.
“If you take the worst-case scenario in 2011-12,” he said, “a reasonable person would assume your premiums would be approximately $49 million to cover expenses.”
The worst part about those worst-case scenarios is that the state property insurance program uses the general fund as a backstop, said Matt Banaszynski, executive vice president of the Independent Insurance Agents of Wisconsin, which supports Walker’s proposal.
“If this was run like a company, it would be out of business,” Banaszynski said. “What that is doing is putting taxpayers at risk.”
If the insurance fund survives and rates go up, he said, the good-risk policyholders likely will get coverage elsewhere.
“What you’ll be left with,” Banaszynski said, “is a small group of people who would pay more to subsidize the fund.”
He said the private market is perfectly capable of handling both the good- and the high-risk policyholders, raising the question of why the state’s taxpayers would subsidize a fund that does not meet market standards or operate like a true insurance company.
The reason for the fund’s existence, said John Forester, director of government relations for the School Administrators Alliance, is that in the past, the “market has not provided adequate coverage for reasonable costs.” There are 239 school districts that hold policies with the state fund, he said.
Forester said the fund should be fixed, not killed.
“Our concern is if we do away with the fund,” he said, “it’s going to increase premiums, possibly decrease depth of coverage, and we’re especially concerned about what it does to the smallest and most remote school districts.”
Those districts, Forester said, often struggle to get coverage for various reasons. Some districts, for instance, are far from fire departments.
Another concern, he said, is the timing of the change. Walker’s proposed budget, Forester said, would cut aid to public schools and expand voucher and independent charter schools, further siphoning aid from those he represents.
“It’s kind of like a cut coming through the front door, siphoning through the back door and an outright increase to school expenditures,” he said. “It really is the trifecta.”
Timing, Brooks said, is at the heart of the amendment he is working on. He wants the state to pull out of the market, he said, but not in a way that unduly hurts the entities that rely on the fund.
“I think,” he said, “it’s important we give school districts and communities an opportunity over the next two years to transition out.”
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