Hail Losses, a Pool Assessment Increase, and a $100,000 Deductible
At renewal, the public entity risk pool notifies a 3,800-student district that its property and casualty contribution will rise from $612,000 to $742,000, a 21% increase, and that the per-occurrence property deductible moves from $10,000 to $100,000. The pool cites three hail losses in 26 months totaling $2,100,000, plus two playground claims. Five-year loss data shows 16 property claims under $100,000 totaling $512,000; the three hail losses were $700,000, $760,000, and $640,000. The district's total budget is $58 million, its fund balance is $4.9 million (8.4%), and board policy targets a 7% unassigned reserve. Options presented: (a) accept the new deductible and assessment; (b) buy the deductible back to $25,000 for a $38,000 premium; (c) leave the pool for commercial insurance at $705,000 with a $50,000 deductible and a $250,000 aggregate; (d) self-fund the first $100,000 with a $300,000 reserve and buy excess property at $410,000. The CFO wants a recommendation with numbers.
1. Estimate expected annual retained property losses at a $100,000 deductible and at a $25,000 deductible, then compare options (a) and (b). State your assumptions.
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Assumptions: small claims average $32,000 and occur 3.2 times a year; hail frequency of 3 events in 2.17 years is treated as a recent trend (about 1.4 per year), which should be tested against a longer history.
At a $100,000 deductible:
- Small claims: 3.2 x $32,000 = $102,400.
- Hail: 1.4 x $100,000 = $138,000.
- Retained total: roughly $240,400 per year.
At a $25,000 deductible:
- Small claims: 3.2 x $25,000 = $80,000 (average claim exceeds the deductible).
- Hail: 1.4 x $25,000 = $34,500.
- Retained total: roughly $114,500 per year.
Option (a): $742,000 + $240,400 + about $15,000 administration = roughly $997,000 total cost of risk. Option (b): $742,000 + $38,000 + $114,500 + $15,000 = roughly $909,500.
The buy-back saves about $88,000 in expected annual cost, so (b) beats (a) on the numbers and substantially reduces volatility. The recommendation depends on the hail assumption; if 26 months is an anomaly, the advantage narrows but does not disappear.
2. Evaluate options (c) and (d) and recommend a funding plan with a reserve target.
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Option (c) looks cheapest on premium but the $250,000 aggregate is the trap: one $760,000 hail loss would exhaust the aggregate and leave the district uninsured for the rest of the year. It also trades a stable pool for a cyclical commercial market.
Option (d) is the lowest expected cost - about $410,000 + $240,400 + $25,000 administration, near $675,000 - but it transfers volatility onto a district with 8.4% fund balance and no property reserve. A repeat hail year would draw $300,000 from that reserve, and the district would still need claims administration, actuarial review, and excess reinstatement discipline. It is worth an actuarial study, not a same-week decision.
Recommendation: take option (b) for the coming year, fund a restricted property reserve of $300,000 to $400,000 (roughly expected retained losses plus two or three hail retentions), and invest in hail loss control - impact-resistant roofing, hail guards, pre-season roof inspection and repair, and a claim protocol. Revisit option (d) after two clean renewal cycles with the mitigation in place. The $4.9 million fund balance is an operating cushion governed by a 7% policy, not a risk-retention reserve; designating part of it requires board action and a replenishment schedule, and the board should see total cost of risk rather than premium alone.