Funding School Risks: Retention, Transfer, and Insurance Program Design
Funding School Risks tests how you pay for losses: retention levels, deductibles versus self-insured retentions, insurance and pool structures, limits and valuation, reserve adequacy, and allocation of cost of risk. Expect questions comparing financing options and spotting coverage gaps.
Core rules and concepts
- Match financing to loss pattern: retain high-frequency, low-severity losses; transfer low-frequency, high-severity losses.
- A deductible usually reduces the loss payment. A self-insured retention is a self-funded layer, and defense costs may sit inside or outside it. Read the wording.
- Retention vehicles include current budget or pay-as-you-go, a funded reserve, a formal self-insurance program, deductibles and self-insured retentions, and retrospective rating.
- Transfer vehicles include commercial insurance, public entity risk pools, captives, surety bonds, and contractual transfer.
- Public entity pools are member-governed and may assess members for shortfalls. Check governance, solvency, coverage, and claims handling before joining.
- Captive forms include single-parent, group, protected cell, and rent-a-captive, sometimes with a fronting carrier.
- Common lines: property, general liability, educators legal liability, auto, workers compensation, cyber, crime, equipment breakdown, flood and earthquake, student accident, and excess or umbrella.
- Watch limits and valuation: per occurrence versus aggregate, umbrella and excess layers, replacement cost versus actual cash value, and coinsurance or margin clauses.
- Fund adequacy by actuarial estimate of unpaid claims, a board-approved reserve target, and disclosure under governmental accounting standards.
- Budget using total cost of risk and allocate premium and retained losses to cost centers. Post-loss funding may come from a bond, disaster assistance, or reserves.
Worked example
A district has nine liability claims a year averaging 20,000 dollars, or 180,000 dollars total. Option A is a 5,000-dollar deductible with a 210,000-dollar premium, so retained losses are 45,000 dollars and total cost is 255,000 dollars. Option B is a 25,000-dollar retention with a 130,000-dollar premium. Because the average claim is below 25,000 dollars, the district retains the full 180,000 dollars, making total cost 310,000 dollars. The higher retention is 55,000 dollars worse on this data. It would only make sense if frequency fell or if the district wanted protection against one catastrophic claim, since the retention caps its payment on that claim at 25,000 dollars. Always check defense treatment and reserve funding before choosing.
Traps that cost marks
Choosing a deductible on premium savings alone. Forgetting defense costs inside the retention. Assuming pool coverage equals insurance. Ignoring assessment exposure in a pool. Missing exclusions for abuse or molestation, pollution, cyber, and athletic participation. Confusing replacement cost with actual cash value. Overlooking coinsurance penalties. Leaving reserves unfunded.