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News & Developments
A Conversation with Frank Stratton, PACE manager
April 24, 2008 - From OSBA's Spring 2008 Critical Issues Newsletter - Frank Stratton is the insurance services program manager for the Special Districts Association's property/casualty and workers' compensation insurance pools. He returned to SDAO after working three years as an account executive and assistant vice president for Marsh USA. Prior to that, he was SDAO's membership services director for eight years, responsible for marketing, operations, information systems and customer service. Stratton is a licensed Oregon insurance agent who earned his bachelor's degree from Oregon State University and a master's from Portland State University.
How did merging SDAO and PACT to form PACE improve benefits to members?
Merging SDAO and PACT into PACE in 2006 saved at least $1 million in administrative expenses, which reduced rates for members. Also, we tripled the number of loss-control positions and claims adjusters available to serve members.
What role do members play in governing PACE?
PACE is owned by its members. As a self-insured trust, all of the assets belong to members. If PACE were to be dissolved, all equity would be returned to members.
Trustees consist of business managers, superintendents, risk managers and board members who serve three-year terms. They are selected from among the OSBA board, with a recommendation from PACE trustees.
What is premium based on?
Contributions paid into the trust are primarily based on exposures (autos, total value of property, student counts, operating budget, etc.) and each district's individual loss experience. The better a district's loss experience, the better its long-term rates.
What are the benefits of belonging to a pool?
Pools are more stable than insurance companies. Because the pool is owned by its members, it's here for the long run. Insurance companies tend to be in and out of the market, depending on their corporate strategy.
Pools were created during the 1980s, when insurance companies would not underwrite public entities. There was a crisis nationwide, and nearly all 50 states created legislation authorizing the creation of self-insured public-entity pools. The same market conditions occurred after 9/11. It was very difficult to find insurance companies that would write public entities and - if they did - they wanted 50 percent rate increases.
Now that market conditions have changed and insurance companies are fighting for market share, they are back in the public-entity market and throwing out cheaper pricing options. Today, most public entities nationwide are covered by pools, rather than insurance companies. Pools also put a much greater focus on risk management and member services, because the goal is not to maximize profits, but to provide stable rates and enhanced service.
What is the difference between a pool and self-insurance?
A pool is self-insurance on a group basis, which allows for risk sharing, so that if one member has a bad year, it can be offset by the good years of other members. The law of large numbers statistically allows for stability. Entities that are self-insured on their own don't have this advantage of risk sharing.
How do our risks and claims compare to other pools?
PACE is very advanced for such a new pool. It has the benefit of the past 20 years plus experience of SDAO and OSBA-PACT.
What trends have you seen in the property/casualty insurance business?
Employment practices liability continues to be the largest exposure for PACE members. Public employees have certain constitutional rights to their employment not available to the public at large. When you hear "Oregon is an at-will state," this is not true when it comes to public employees. Because of the federal civil rights laws, it is nearly impossible to avoid a lawsuit when terminating a public employee without going through all of the correct legal steps. This is why PACE has $100,000 budgeted per year for pre-loss legal services. If we can avoid even one employment-related lawsuit by getting a member good legal advice in advance of making a termination decision, the service more than pays for itself.
What does paying defense costs outside liability limits do for members?
To provide the maximum coverage, liability limits offered to PACE members do not apply to legal defense costs, which may far exceed the damages awarded. Defense costs now account for nearly 50 percent of all liability-related costs. If a member has $5 million of coverage and PACE spends $5 million on legal defense, the member still has $5 million of coverage left in the event of an adverse decision. With most other liability insurers, legal expenses are included in the coverage limits, so that if a member has $5 million of coverage and spends $5 million on legal defense, there is no coverage left in the event of an adverse decision.
What's the difference between occurrence-based and claims-made coverage?
PACE liability coverage is occurrence-based, meaning PACE covers anything that happens during the term of the policy, regardless of when it is reported - even decades later. Most other insurance providers only offer claims-made coverage, which means you are only covered for claims reported during the one-year term of the policy. Claims-made coverage is a "loss-leader" approach to insurance, designed to increase yearly as claims are reported. Although the initial cost may be low, it never has been and never will be cheaper, because the price increases yearly, leveling off at the occurrence-price level.
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How do you anticipate trends?
Every year, we evaluate and track loss trends to identify priorities for loss control and training. Last winter, broken pipes during vacations caused widespread damage and were a huge concern. We immediately put together an information and education program to address the problem. Part of the five-year plan is to annually evaluate these priorities in relation to real claim problems.
What do you hope to see - and hope NOT to see?
I expect PACE to continue building credibility with members by keeping rates stable, expanding coverage and increasing services while also building a healthy surplus. I hope not to see members simply looking for a cheaper price each year without considering the service, coverage and stability issues.
How do we get better pricing as a larger pool?
We just met with Lexington Insurance Company, our property reinsurer. The past two years we have had large fire- and storm-related property losses that adversely impacted the loss ratio of Lexington. Normally, we would expect that to cause a large premium increase. But because our reinsurance premium volume is so high with our combined program, Lexington wants to maintain our business and offered PACE a rate decrease, even after the large losses.
What other options exist for school districts to buy property/casualty insurance?
Some insurance companies are once again becoming interested in writing school district polices. Anyone looking for property/casualty insurance needs to ask, "Where were they in the hard times?" and "Where will they be when hard times come around again?"
How does PACE compare with companies coming into the market?
We are very price-competitive, but rates continue to drop nationwide. As a self-insured program, we have a responsibility to be very conservative in maintaining our surplus. We can't afford to take a risk with taxpayer dollars. As a result, we can't always follow the market down. We will continue to contain costs, look for the best reinsurance options and do everything we can to keep pricing affordable for members.
Providing PACE's level of coverage means that we can't always be the cheapest. But no one else offers pre-loss legal services, grant programs, occurrence-based liability coverage for all lines and additional defense coverages.
If a district left PACE for small savings now, it would likely have higher long-term costs in claims not covered.