ALC-Executive Subcommittee

I'm weather lord just pray that people will be able to do things outside and enjoy fellowshipping company with each other or and we just pray for europe your guidance in your wisdom today as we do the people's business in the south meeting here that we will be able to take what we learn back to our constituents and make sure we faithfully serve them or just want to put our hand over a presenters that they may present to very very well today for us and. Or just thank you for the country that we live in in the freedoms that we enjoy and we say this in your precious name image. Thank you. Case are video dins they are gambling like them up i'm sorry I didn't know that. Uh oh no presentation today we have mister carhailson this charles lands with per night and the ground gives our education of facility property insurance study we welcome you gentlemen today and if you will give us your name for the record and then you're recognized to present. Hi i'm charles lensen gobby charlie i'm principle that period. And i'm kyle hails on a principle and consulting actually a per night as well. Thank you and proceed. There we go so the slide and foreign of you as one which is made the rounds a lot it's from nowhere and it shows the number of billion dollar weather related events over the last forty five years and the point of showing this really is just. Sir to point out the upward trend. And to make the observation that the last several years is has been significantly different than prior years and that's something that we see in the arkansas school and and. Public agency trust data as well. Okay so the next one this week we finished the. Main part of the actual analysis where we look at all the claims history going back to two thousand and seven. And develop an estimate of the costs for the current year which is incomplete and is is subject to change from our estimate and we've developed our preliminary estimate for the twenty four twenty five year and if you look at this graph you'll see a similar pattern to what we just saw on the north data with the large catastrophes which is. Relatively stable losses in the earlier periods and high losses in the recent periods and this is a theme that that we're encountering over and over again in insurance programs. Regardless of geography in the united states if you look at the the latest four years here the average is twelve point seven million and all of the priority or is the average is a little over three million so that's a it's a big change from the way things were five years ago. And arkansas public school insurance trust much the same pattern different results. Again the twenty four twenty five is preliminary we're still doing some some optimising of the actual models that we will we lie on but again here the latest four years average eighteen million and the all the prior years average three point eight million so the same pattern of rising losses in recent years and then with the arkansas school boards association it's even more and exaggerated case because of the uhm win high school um tornado in the twenty two twenty three year. Um. The average costs were thirty four point six million in the latest four years compared to under three million. In the prior years and even even if we were to have thrown out. The uhm. The wind tornadoe loss the average loss would have been fourteen million so similar to the other two programs. And excuse me. These next slides are what we call lost ratifications and these are what. Uhm insurance brokers and actual worries look at. When they're doing a retention analysis and that is an analysis that's done to determine how much risk. A policy holder would want to take. Given the available coverage out there in the insurance market and one of the conclusions that are jumps out of this is that a very high percentage of the claims or small claims you we've got a almost eighty six percent of the claims or over. Under a hundred thousand dollars and you would we call the the lower layer losses a working layer and then the higher layer losses are the excess layers. And the excess layers. No matter what the program design is it'll be some combination of a retention of some amount it could be that. American multi agency insurance trust decides. To self insure the first two and a half million dollars per claim and. And have an annual aggregate of fifteen million dollars i'm just making something up that would represent a reasonable choice of a program structure. And then they would purchase insurance for the higher layers. And the thing to keep in mind this is a topic will come back to in a few minutes the insurance in the higher layers when the insurance companies the excess insurance companies and the reinsurance companies are pricing those layers of insurance they do much of the same as what we do they estimate what they think the losses are going to be in those layers of coverage and then they load that for their operating expenses for a profit target and then also for a contingency a risk load because you know the higher the layer the more risk they're taking the more profit they're going to want to have for taking that risk and that's just a. File away in the back of your mind. When we get to the last line. The next lie same structure of the exhibit it's a lost ratification for the public school insurance trust and this is even more it and exaggerated case where almost ninety six percent of the claims are less than a hundred thousand dollars so in. The it may be a a good idea for example to have the location deductibles increase so that a lot of these claims don't enter the insurance program that they're just paid by locations of course that's I know it's not a simple topic and will depend on the the schools in their ability to pay and so on but that's one way of reducing insurance costs and are incentivising the schools to practice. Sound. Risk management behaviors. So that's one tool that gets worked and it that gets used a lot and again this is something that we would look at to make suggestions about what the structure might look at like if the. If the insurance trust were to take higher retentions and get a little bit higher up into the working layers and may be into the lower excess layers. Uhm. So we can move on to the next one. The next is the again same exhibit for the arkansas school boards association similar pattern this does have the large win high school tornado fire and and fire in it. On the bottom line that's accounted for fifty percent of the losses for for all seventeen years of history that we looked at so that was a extraordinary event. Um. So same. Same conclusions here this would be used as a tool to make decisions on part possible reinsurance or insurance structures. And then the last page is a. We did this specifically for the arkansas multi agency insurance trust. Uhm because this is the one that we got finished first and we're still doing some refinements on the claim simulation models for the other two programs and those models are used to calculate the impact. Of an aggregate retention on the expected retainer losses but we got this one done in this one works well as an illustration. So the top row. These are estimates for the twenty four twenty five year we estimate that the total cost of claims in that year is fifteen point nine million dollars now this is property insurance it's very much depending on the weather it's far from a certain estimates and its almost certainly going to be different than this and likely be significantly different but the point is is that we think it's just as likely to be too low as it is to be too high so it's our best estimated and expected value estimate. And then the number below that the seven point seven. Is the estimate of the losses that would be retained next year. Under a program with an eight point five million dollar annual aggregate. Uhm so. What we found in doing the simulations is that we'd expect that with an eight point five million dollars aggregate the program is much more likely to hit that eight point five million dollars. I exhaust that aggregate in most scenarios of the of the claim simulation which is to say that with that structure. Uhm the insurance edit the insurance trust is not taking a lot of risk. And it's it's fairly certain their losses are going to be around. Eight million dollars or eight and a half million dollars. In that means that all of the risk is being taken by the insurance markets. And the inch that's where the there is a potential savings. So. If in the future m eight were to take a higher retention. They they they would retain expected losses that are higher and the insurance would be less and come the premium that they wouldn't be paying would include some of the risk charge that they would charge for the wrist that they would no longer be taking with the lower retention. So. The arm going on to the next line the eight point two million dollars represents the expected loss or the insurance company and this is for all perils aside from earthquake and flood because the historical claims data does not have doesn't have a single earthquake loss in it and I think there are two flood glasses in neither of them were catastrophic there were low level losses so for those two perils relied on the cap modeling report and that's where the three point four million and the eighteen point seven million dollar numbers come from those of the expected losses the average annual loss for those uhm those perils. And i'll just take one minute to talk about that eighteen point seven million dollars. Ah average annual loss estimate. You know if you were to if if the program were to take a higher retention even a higher retention on flood one thing we know from looking at the history is that there's been a a lot of money included in the premium that's been paid for flood coverage and it's gotten very big and there haven't been any floods in seventeen years so that is just a example of some of the risk that. Uhm the multi agency insurance trust could take over time and reduce the expenses that they pay to insurance companies and reduce. The profit loads that they pay to insurance companies. Um. The total cost of risk is the sum of. Uhm the quoted premium so this thirty two million dollars is from the quote that just came in last week. For the twenty four twenty five year. Wit assuming eight point five million dollar aggregate in a sixty five six hundred and fifty million dollars program limit. Adding that thirty two million dollars to the seven point seven million dollars of retained cost that's cost retained by the program that does not produce thirty eight point one million it produces thirty nine point eight I had a mistake in my exhibit here but. The illustration here was done. To just talk a little bit about the segregation between what. Risk the insurance company takes and what risk. The the program takes or could take. And to look at what the total cost of risk years. I envision that assuming there is some desire to take on more risk and I don't know that that's the direction that. The program will go in but if it were to go in that direction what we would do is is pick several parcel structures for the insurance program and those could involve per current retentions aggregate retentions. Local deductibles that are different than what they are now. And what we would do is model the total cost of risk of all those scenarios so that you're one of the nice things that comes out of that as it tells you what you're expected lowest cost choices. Of the various insurance structures that are being considered. Sure i'll just touch on a couple things to that that that charlie mentioned but in a one one key component of this is as you mentioned before in line in line too what are expecting losses of roughly seven point seven million dollars on an annual basis whereas the aggregators so again just to kind of highlight this point in assence the the multi agency insurance trust but really isn't taking on a lot of risk I mean the most it's going to go from that average of seven seven is really up to the eight five so in essence what the way that the reinsurers are likely looking at this this program is that there's the ones essentially bearing the uh the burden of your losses potentially exceeding what the out of the long term averages are so in essence they've built that into their their risk loads and their pricing models and in things to that effect is you know is a future um. Update to some of the studies we're going to go through and kind of look at different scenarios to say okay if we were to retain more risk what does that look like what do the claims be a likely come in what would those average cost be and then compare that with the quotes that we would get from the reinsurers just to see on an overall basis what makes the most sights right now again to want to draw any conclusions but right now the data is likely pushing us in the direction of saying well if we retain a little bit more losses here we could save more premium on the back end due to the uh the fact that there are more risk loads in the reinsurance component of the premium versus the underlying component in in one other component too that will look at is right now we've looked at these as three separate antities beyond terms of the multi insurance agency trust in in the two different school antities as well will look at a third model that combines all three in that could give us some some good risk diversification both in terms of potential locations of where the risks are in as well as the types of buildings that would be ah insured through this program so again we're were far from done with this study there's they're still a lot more to to look into but this is you know such a kind of a status check of of where we are in before you want to reservices I don't know if there's anything else charlie when talk about from the actual real side you know just. Just on the topic of even whether you know combining the three programs is advantageous or not mean one of the possible advantages you get. From doing that is the as a larger energy you would have a more buying power with the. With london reinsurers because you're a bigger risk and generally that's just a rule of them you you can play with with some of the bigger players over there if you were three times that the size that you are and there could also be some expense savings if you were to do that if you were for example example to form a captive insurance company you could then go to wrapped to reinsurance markets and save on the reinsurance commissions that get charged and those can be pretty significant so there are potential savings to be made there and but there there could be other economies of scale as a combined entity but I don't we haven't studied that I don't know you know to what extent that you would be significant. And then i'll just provide a quick status update on the reservices peace cell is a reminder what are interviewing neighboring states just to kind of see how they design and develop their their commercial property programs as well I think it's on there. So just out quick summary that not a huge update from when we met last may were still reaching out a lot of risk managers there some of them have done a good job of getting back to us some of them have not we are starting to find that the structures very quite a bit though state to state for example louisiana is a state where everything is more owned on what they call the perish level which is centrally their equivalent of a county so they don't have that their group buying power advantage that the state of our consultant would have other agencies or other states i'm sorry we're still waiting to kind of hear back from them but that'll be part of the next update or we go through in and kind of look to see what other states are doing I will see this in my opinion what the other states are doing is more or less what I would call it a data point so it's something that we could look at we could reference we could see what makes sense but it doesn't necessarily mean that it's going to be you are fault decision will be based on that it's nice to you know be safe and know that all other states have have set up their insurance structure you know one waivers is another but um II really think that the bulk of the decision making should really come down to the the underlying data the actual analysis that we're doing and you know just ultimately what makes the most sense for the state of arkansas. Yeah. Or you're the day out of show and ninety percent plus of the claims were the hundred thousand and below is there any breakdown. In in the data that shows so you roof claims versus. Structural. Um claims as there are anything that. That turn in in the daddy that shows there. As of now I don't think the data that we've been given has enough detail to be able to to analyze roof claims separate from other claims but that doesn't mean it doesn't exist and we can ask for it where we've had some at discussion previously and III do keep playing bag on me because that is a. Some percentage of the head in and if if we could change our. Uh. History in. Going to support its more weather resistant even if her cars meeting problems over a period of time it would take a period of time but I would think that would have benefits. Over the time. I've got question from representative broke you are recognized thank you mister chairman and this may be a long blinds of of as you aggregate more detailed data relative to roots and other things but have you seen anything in your analysis when we look at numbers such as that zero hundred thousand dollar layer of losses there school absolute public school insurance trust sixteen or sixty six glasses compared to the other two do you do we know why the volume of seem to be out of a wack there. No. Short answer we haven't dug into that level of detail. Any other members have questions. Not seeing any gentleman thank you for being here appreciate your input continued work on this look forward to hearing more. Excellent thank you thank you. Next we have director guarantees report. You mister chairmar to guarantee what the bureau of legislative research june generally in july the legislative council looks at either cancelling legislative council meetings or providing the subcommittee's final authority due to the various conferences that are occurring in july this year there are three conferences back to back in july that are going to affect that fall right around council weeks I wanted to provide this committee with the option of either cancelling alc or providing its subcommittees with final action authority. Also august we've got the cti renovation for the audi visual items as well as their times when the august council mean council meeting is pushed back a week so that I present for your consideration also. Okay and sit ur in your recognized thank you. I moved that the legislative council meeting for the month of july twenty twenty four is canceled. Also move that the alc subcommittees are permitted to meet to take up items that have an eminent need search that they cannot wait until the regularly scheduled august meetings of the sub committees also that the alc subcommittees are permitted to meet outside the regularly scheduled alcee week in july and i'll actions of the legislative council subcommittees that would normally be reported at the july twenty twenty four meeting of the legislative council will be considered final and shall be reported to the legislative council at its august meeting which has been for which has been rescheduled for august the twenty third twenty twenty four. Okay that is a proper motion reading question from membership on the motion. Not seeing any home in favor of the motion say I post. Emotion is adopted we thank you for that yesterday and seeing no other benefits we are adjourned.