The Pooling Effect MUNICIPAL INSURANCE ASSOCIATION of British Columbia Tom Barnes Chief Executive Officer & General Counsel

The Liability Insurance Crisis  Insurance industry abandons public entities ○ Dramatic premium increases ○ High deductibles ○ Restricted coverage ○ Constrained availability

Risk pooling was one of the few options available

FOLI Theorem – Market Cycle Public entities: First Out Last In

The Result  100,000 public entities in North America ○ 85% get some form of coverage from a pool  $13-17 billion in premium

In North America  500 Pools Liability Property Auto Worker’s Compensation Specialty Lines “The greatest success in intergovernmental relations.”

Almost before most pools could begin operation, the market cycle saw: Crisis end Prolonged soft market established

The Pooling Effect Yet pools have thrived, because of

The Science of the Pooling Effect Heads: Win $1,150 Tails: Lose $1,000

The Science of the Pooling Effect In this simulation by a random number generator, the result is a collective net gain of $7,500 ($75 per person). Individual stakes are lower, despite total stakes increasing 100 fold. 54 participants have to get tails to create a loss ($11 per person).

The Science of the Pooling Effect The tipping point is now when 540,000 people get tails, which is almost impossible with a 50/50 chance on each flip. There is a certain net gain.

Risk Pools apply the science of the Pooling Effect if its risks are:  Analogous  Diversified  Uncorrelated

The Pooling Effect is amplified in practice  Finances  Collegiality  Risk management services  Customized coverage

The Pooling Effect in Practice Finances Public Entities value long term cost:  Stability  Predictability more than the market cycle that can occasionally deliver lower costs.

The Pooling Effect in Practice Finances Pools inherently moderate the volatility of insurance costs over time  Member commitment  Capital adequacy  Cost allocation

The Pooling Effect in Practice Finances  The combining of uncorrelated risks always produces the pooling effect  Prudent funding results in surplus funds  Surplus funds result in Financial return to members Capital accrual

The Pooling Effect in Practice Finances  Pools cost of capital is relatively low ○ No capacity/ROE conflict. ○ Tax exempt investment accelerates accrual.

The Pooling Effect in Practice Finances  Capital fosters stability.  Financial returns reinforce long-term commitment.

The Pooling Effect in Practice Collegiality  Information and knowledge sharing  Joint initiatives  Pool resources Not viewed as giving a competitive advantage to an adversary.

The Pooling Effect in Practice Risk Management Services  Sector-specific knowledge and experience applied for benefit of all members  Higher risk members can’t be underwritten out of the pool  Risks themselves must be: ○ Identified ○ Monitored ○ Mitigated

The Pooling Effect in Practice Customized Coverage  Goal is to provide members the coverage they need. ○ Risks emerge and evolve, so must coverage ○ Even where there is no market to provide it

The Pooling Effect in Practice The smallest member has access to the resources usually available only to the largest members.

The Pooling Effect in Practice Reinsurance  Pool working layers  Reinsure catastrophe exposure

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