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In our high school social studies classes, we were told that
history often repeats. While I’m not sure that’s totally true, things that are
past sometimes become new again. Perhaps a more appropriate adage relates to a
famous quote by Mark Twain: “History doesn’t repeat itself, but it often
Lately we’ve seen a lot of rhyming — reemerging historical trends
with tremendous implications for business and society. These recurring macroeconomic
conditions are impacting insurance, as well as public and governmental
organizations. And while these trends present challenges, public entities can
use risk pools as a powerful and practical answer.
Inflation has been the most visible and oft-discussed
renewed historical trend. Rising energy and food prices were a stubborn problem
for Americans in the 1970s, and some consumers struggled to keep gas in their
tanks (when they could get gas) and food on the dinner table.
As shown in the graphic below, the American economy is
experiencing something similar in 2022, albeit less acutely. A number of circumstances
(pandemic, supply chain, energy insecurity, among others) have led to several
quarters of rising inflation.
This year, as in the early 1980s, the U.S. government’s cure
has been to reduce inflation through monetary policy. Now, as then, the
government has raised interest rates on federal funds to bring inflation under
control. While we have not yet seen a repeat of the 21% interest rates of 1981,
we have seen rapidly increasing interest rates and higher costs for credit and
Inflation and its cure have always been formidable factors
for consumers, businesses and government entities.
The historical parallel is important with respect to pools. An
inflationary, relatively high-interest rate environment led to the widespread
creation and use of public entity pools in the 1970s and 1980s. They were
formed as an innovative response to skyrocketing coverage costs with an
associated liability crisis. It worked. Pools have not only sustained strong
fiscal performance but have also reduced and stabilized long-term insurance
costs, providing access to coverage needed to sustain key local government
Today, public entities are finding themselves in the middle
of another liability crisis, similar to the 1970s. Insureds have experienced rapidly rising premiums, reduced coverage and increased liability such as for law enforcement and cyber liability.
Pools are once again the answer for the difficult conditions
that their members face. Partnering with actuarial consultants can help
facilitate renewed innovation in the pooling space, providing support to pool
members as they navigate new (and old) marketplace challenges. Many pools may
consider an actuary’s role solely to set reserves and funding levels for the
upcoming period. However, actuaries can also evaluate a pool’s capital position
to determine if a pool has not only enough capital to support its operations,
but excess capital that may be used to take advantage of future opportunities
to better serve its members.
The innovation to help pools build and grow can take a few
different forms. For example, pools can use excess surplus to provide:
Pools can also utilize the flexibility of captives, and form
Whatever the shape and form, pools were born from
innovation. This foundation gives pools the framework to adapt to a rapidly
changing world, resulting in a strengthened relationship with existing members
and additional credibility to attract new members.
Pools have had spectacular historical success — for government entities and their constituents. Consultants need to understand that past as they help pools look to the future. As history repeats (and rhymes), and old crises become new again, pools and their history of innovation will continue to be the answer.
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