Knowledge Center

Knowledge Center Items Podcast Episode 23

This is Why You Need to Know Total Risk

Published on

Because it's an easy way to get creative and win new business. 

When you present an account with one bottom line number it helps make a lot of decisions easier. 

Now they can easily see alternative ways they can protect their business. 

It also helps you to stand out from the competition in a big way. 

Bob Lombard, RPS Area President, talks about how you can leverage total risk on your next public entity account.

For more Change Insurance episodes, click here.

Full Episode Transcript

Joey Giangola: Mr. Bob Lombard. How're you doing today, sir?

Bob Lombard: Doing great. Joey, how are you?

Joey Giangola: I'm doing good. Bob, I was taking lunch the other day, and I was having a snack with my lunch, and I was thinking to myself, what's the type of snack that you feel, illegal might be a strong word, but should be at least come with some type of warning, because you just can't seem to find your way out of it because you just keep eating it. I know I have mine. But I was kind of curious if you have a kind of a kryptonite in that department.

Bob Lombard: Oh. Any bowl of, having to deal with chocolate and peanut butter combined, that would definitely be kryptonite and something I could not avoid walking by without sticking my hand into it.

Joey Giangola: Well that's yeah, that's definitely an easy one. I was kind of going on the route of the ones that feel they don't taste that great, but you still find yourself... and for me it's a box Wheat Thins. I'm like, "What am I doing? This is borderline cardboard." But yet there's some sort of addictive substance in it and I can't quite deal with."

Bob Lombard: Oh. Good grief. That's a great analogy. I tend to lean towards Wheat Thins myself, and I can see where you would believe that it's petrified cardboard with salt on it, but then when you add some additional topping to it, it becomes a quite tasty at that point. So Wheat Thins are more of a vehicle than they are, and actual something you would sit down and eat. But yeah, I've always said any type of candy corn, that is a kryptonite, coming up on Halloween candy corn is definitely a kryptonite that we just don't need around the house, to be honest with you.

Joey Giangola: Well, sugar definitely has an unfair advantage, I think, across the board. So we can certainly agree to that. But don't judge me, Bob. I might take down a whole box Wheat Thins with or without cheese. So don't judge me on my character.

Bob Lombard: Hopefully it's not Cheez Whiz.

Joey Giangola: No. Certainly not. There are standards in this house. They're not very high, but there are standards. Bob, let's talk about something a little more pressing, a little bit more important. What is going on in your world in terms of public entities, coverage around that? What happening in terms of that for you?

Bob Lombard: Well, we just finished off probably one of our most busiest seasons. I've been, I've been in the business variety of public entities now for 27 years. This year, despite what's gone on in the economy, this has probably been our busiest season with respects to renewals. That was driven primarily by restrictions of coverage, and terms, plus increases in rates by the carriers that trickled down to public entities in general.

Honestly, a lot of that started prior to the COVID outbreak. So consequently, it was carrying forward into this year's renewal season. Most public entities renew July 1st, I'd say about 70% of them out there in the world, and they were starting to feel these effects going back to 2019, in some cases 2018. As a result of what has gone on globally from losses, what has gone on nationally from changes in laws, so a lot of this was starting to impact the carriers, and the carriers were making adjustments. Again, they were passing those adjustments on then to the actual entities themselves.

Joey Giangola: Yeah. That's something I think we're seeing across the board in a lot of different industries right now, too. Is there anything unique to the public entity market in terms of that rate conversation that agents should be considering when kind of dealing with that?

Bob Lombard: Well, I think you have to look at public entities in the general, they're in the spotlight daily with respects to obviously some public entities having law enforcement, we don't have to go into what's going on in the law enforcement world, but definitely in the spotlight on the news nationally, constantly, and consequently, that that impacts how the public entities are perceived within the world itself.

That impacts what happens in the courts with respects to some lawsuits, with respect to settlements. Public entities, they have been, by virtue, of their locations, by virtue of how long they've been in existence. They have significant property exposures that have been there going on centuries in some cases, that suddenly there have been a wave of losses.

We look at what's going on in the West Coast with respect to fires. Fires had not impacted the public entities from property's perspective, up until the most recent three to four or five years, I've got a fire burning 40,000 acres west of me right now. Fortunately, it really hasn't impacted any entities, it's a wild land fire that is not going to impact any structures, although there're five houses that were lost to this point.

But we see that quite a bit in the West Coast here that then impacts their ability to acquire insurance, excess carriers because of the what's gone on in the employment practices standpoint, from equality in the workplace, wrongful terminations, the sexual abuse, sexual molestation aspects, the excess carriers have gotten nervous with respect to the potential for those claims. The laws have changed with respect to the length of time for reporting claims.

So consequently, the carriers did not contemplate that, and so now they're having to go back and readjust their positions in how they view that. So that has shrunk the excess casualty market to this point as well. So there's a lot of issues facing public entities, as we see them, we're trying to address them through alternative risk products, addressing them through maybe the entities taking some more risk of their own in the versions of a deductible or a retention.

Looking at what's available from a resource standpoint for the entities from a risk management perspective, i.e. loss control and safety. Then the carriers themselves are asking those same questions. What are they doing? How are they preventing? Have they add? So it's just been a constant dialogue between us, the carriers and the entities to answer the questions to make sure we're all, all three on a solid ground.

Joey Giangola: Yeah. Obviously there's a lot going on there. If you're an agent that has the business of the entity that you kind of are chasing we have the advantage of, we can obviously work with whatever agency sort of is already kind of entrenched there. But if you're looking at it from an agent who is maybe on the outside looking in there with all of this going on, what's the best approach for them to sort of leverage all of this, we'll say, disruption with the rates in the market to kind of have a shot. What's going to give them kind of a best shot to get their foot in there? Because it is usually a business of long, entrenched sort of relationships, right?

Bob Lombard: Yeah. I would suggest it starts with a dialogue between the agent and the entity. Entities have a level of management that goes in and reports up to the Governing Board, whether it's a City Council or County Commissioner or a School Board, but typically there's a finance officer risk management office, and it starts with a dialogue there. Having that conversation with them to make sure that their current agent is doing everything they possibly can to be creative in their approaches, to bringing solutions to the entity, and what alternate alternatives that they have looked at in the past.

Then working with a partner, such as RPS, that have that global capabilities and have that, that long-term history of working very specifically with a specific type of exposure, and specific type of entities, such as our business unit had been doing this for over 40 years. Some of our people have been doing it well over 25, myself as well. So consequently, there're not many markets out there that we haven't talked to, that we could bring our expertise down to the local level and help that agent in those conversations to make sure that we're bringing the best structure to the entity that fits the entity's needs, their appetite for risk, but also matches what the carrier world in the market can provide.

Joey Giangola: You mentioned creativity. That's always sort of the fun, and maybe overlooked aspect of insurance in a lot of ways. What are some of the more easier... I don't want to say easier, but what are some of the best ways to look for that creativity, maybe, you're putting together that bid? What are those things that agents aren't thinking outside of the box far enough on?

Bob Lombard: Okay. Creativity, you've used the word "fun" in insurance. I can tell you, sometimes it's not fun, especially when you're trying to get markets. But creativity starts with sitting down with the entity and saying, "Are you willing to accept this deductible? Are you willing to accept this retention?" That is defined as how much of the loss the entity is willing to pay out, and perhaps doing some financial analysis that compares their losses as to what they're paying from insurance premiums.

Then maybe getting a little creative to say, "Look. If you would have maybe expanded your deductible, expanded your retention over the last two to three years, here's what have been the savings that would have been in your pocket." But not to mention that the ability to maybe manage some of that risk may have a say in the claim's activity, may have a say on how the claims are settled, and have greater input into your insurance program, as opposed to just taking a dollar, if you will, and hand it over to an insurance company and never having a loss paid and then having to pay that next year, that same dollar, and perhaps because of what goes on in the industry, you pay 10% more, and never getting, necessarily, a return on that.

So the creativity comes into how you're looking at your coverages, how you're looking at your retentions, how they match up to your financial goals, how they match up to your risk appetite goals. Then additionally, is what capacity is out there that can provide you the level that you desire.

Back when the market was quote/unquote "softer" for things flood and earthquake insurance, we were seeing entities buying more earthquake insurance, because once they acquire that in the market they tend to hold onto it in the market, specifically if they have never had a loss in that marketplace. So that was a creative approach to put your name on something that the carrier partners looked at you and said, "We're going to allocate our capacity to that entity because that entity has been a partner of ours for a very long time."

Joey Giangola: That's pretty interesting, Bob. So what do you think might be some of the hesitations from the public entity, the municipalities' standpoint from maybe being receptive to that creativity in a lot of cases? Because I'm sure they've been presented with things in the past where, if they haven't had a chance or willingness to increase the deductible, to increase the limits, there's been something that's held them up.

Is there something that there's a communication breakdown at that point between them and the agent, not fully sort of having a good understanding of the dollars and cents as to how it all balances out?

Bob Lombard: I think it goes down to communication, and understanding, and how that is presented on an analytical basis, and being able to look at it from a historical perspective, understand what the true costs are of their insurance program, we call it the total cost of risk. That could be a combination of what you're actually paying for insurance premiums, which you pay for your own losses, as well as what it costs to manage that particular program.

If those aren't laid out very carefully for an entity to sit down and make a good business decision, then there may be some resistance for them to take those next steps. Now, there also is that comfort zone. There may be a comfort zone in the fact that we're very comfortable with this carrier. This carrier has treated us right for all these years, and we don't want to go down this path, because it's easier for us to continue with the status quo.

Well, market conditions at times can force that change. That's where we to sit down and have those conversations and put them back in a place with a market that can provide that long-term stable product for them, but helps them grow as they as an entity grow, and helps them meet their pitfalls and mitigate their risk as that comes up in the life and span of that entity and those involved.

Joey Giangola: Bob, I mean, I might just derail this whole conversation so we can just kind of go off and talk about total cost of risk for an undetermined amount of time. Because that's a phrase that I don't hear often enough, nearly as often enough as I would think when talking to insurance people. What is it about that sort of viewpoint of the kind of account that may be agents miss a lot of the times? Is it something that it's just not maybe common practice? Again, I don't hear it that often, but it is, I think, a very powerful tool though.

Bob Lombard: Great question. I think you don't hear it often. There are certain entities out there that truly need to be with a carrier program that is what we call first dollar or primary program. Their insurance costs, maybe five- to $10,000, they don't have a budget that would allow a higher retention, and they may not have staff that helps to manage their program. They may rely heavily on the insurance carrier, and that is absolutely fine. They're in a right spot.

But when you come up on an entity, that's may be paying five-, six-, $700,000 to a carrier on what would be considered a primary first-dollar type of program. That's when the conversation really needs to start. That's when you sit down. I saw somebody one time do an analogy, you take a dollar and you break it down into four quarters. Like I said earlier, you give those four quarters to the insurance company on a primary program. You don't get to keep that, you get nothing back in return, and don't plan on getting back anything in return.

But if you start to look at an alternative risk type of program, and looking at your total cost of risk, perhaps you get to take one quarter and manage how that quarter is spent. At the end of the day the goal would be, through that management, you would then be able to retain a portion of that. So in the end, maybe your insurance program only cost you 90 cents on the dollar. Then when you start compounding that by what we look at the total cost of risks of that 500,000 program. Now, the program costs you $450,000 that year. For a public entity, $50,000 is huge to their budget.

Every year, a public entity has to create a budget, have approved budget, and live by that budget for a 12-month period. They don't have an ability to retroactively sell more widgets, to retroactively pay expenses that occurred five years ago. So consequently, a public entity on a fixed budget as opposed to a commercial risk, and just turn the machine up and sell more product.

So through the analysis of the total cost of risk, they can sit down and actually take a look at those losses, take a look at those expenses, and put a pencil to it. Then sometimes of the entity is big enough, perhaps asking an actuary to take a look at it and do some analysis with respect to where they should be from a rate, what they should be charging themselves for their losses, what they should be putting away in a savings account for those types of losses, and for how many years they have to do that.

Because that is just not a one-year situation, as they said, an entities budget it's year, to year, to year. You put away dollars for today for losses that happen tomorrow. You need that bank account saved today for those losses that happen tomorrow.

Joey Giangola: Yeah. That's, I think a conversation that goes deeper than maybe the average insurance conversation goes, which I find fascinating and fantastic on many levels. There's a lot of different kind of branches or areas that could be considered public entities. Most commonly: municipalities, fire, police, all that kind of stuff. But that also extends into school districts and things that. Is there one maybe over the other that is generally easier to kind of get a foot in the door that is more receptive to maybe some of these conversations versus... Or, are they all sort of, kind of once you get in one, then it's easier to just kind of work your way through?

Bob Lombard: Well, great question. Counties tend to have a larger total cost risks than, say, your smaller, special district especial district could be identified as a park district, or a small water district, or sanitation district that is set up, as a government entity to help support the citizens of that particular county. They're identified as two separate entities and treated as two separate entities. So typically a county would have a larger budget, and a larger insurance budget, by virtue of the size of the population that they're servicing next would be schools.

Schools have a larger population, and typically also, because of virtue that their properties, their properties are newer, they tend to cost more to rebuild. They tend to have a larger fleet when it comes to school buses, as opposed to a public entity work truck or public entity sedan that maybe running around. I'm not saying that public entities, and cities and counties don't have large fleet values because obviously fire trucks, ambulances, and some of the specialty police vehicles are also very, very expensive as well.

So schools, and then the cities just naturally just fit right into it. It's a situation where entities kind of crossed the threshold of, we look at 75,000 population as somewhat of a threshold there where we start to see those insurance premiums start to climb up into where a conversation could be had towards alternative risk.

Joey Giangola: Yeah. It's interesting. I like that number 75,000. Is there other sort of benchmarks, kind of sweet spots to consider, for agents to look at, in terms of breaking down the different sizes? Where's the nice place to play versus when they might get into more steeper competition? Is there an area that generally finds itself kind of suited for different conversations?

Bob Lombard: Well, we look at it more on a premium basis. So when you're spending 400,000 and north for your program, your insurance premiums, that is a good threshold when it comes to considering an alternative risk type of product that would allow you to take a larger retention, and have some protections around that retention. As opposed to, does it make sense then to... Do you see the efficiencies and efficiencies and costs, to stick with more of a primary program, and maybe just increasing your deductible from 1,000 to $10,000 in that situation.

Joey Giangola: All right, Bob. I've got two more questions for you. We've kind of covered a lot in terms of the public entity space, but what in terms of kind of looking ahead, do you think is most exciting? What's right around the corner for agents to kind of keep their head on a swivel for that you find most fascinating?

Bob Lombard: Well, public entities, it's interesting. Like I said earlier, they're always in the spotlight, so it's a risk that is very, very well exposed and exposed to the public but has a high level of expectation. Also, it's construed to have a deeper pocket. So the attorneys enjoy bringing public entities into court. So you're constantly having to look out for what's going on locally in a public entity, and be aware of what's going on locally and how, think on how that can impact the insurance program, whether it's a change in just administration of that entity, and election is a great example.

Every time we have an election we tend to have new decision makers for that particular public entity, for which then sometimes changes Board policy, and changes how the direction of the Board, and how they treat the entity. So you always have to be on the lookout for those types of changes that could seem subtle, but they can have a huge impact.

Joey Giangola: All right, Bob. Last question to you, sir. You've been in the game a while, and you've seen a lot of things, but what's left in the tank? Where are you still excited about? What's the thing, specifically, to you in insurance, that you think has the most potential to kind of impact your... I guess I don't want to call it a third act, Bob. But as you sort of, that last chapter. What do you think is right there for you personally in terms of insurance that you kind of can't wait to get your hands on?

Bob Lombard: You're full of good questions, Joey. Honestly, I believe it's teaching those around me what we have learned. We have dealt with a product and sold a product called [All-Lines] Aggregate coverage, All Lines being all lines of coverage. There's a few of us out there that know that product through and through. Then there's a whole world of agents that are not familiar with that product. I don't think it's any fault of us with the gray hair, and who've been around for a long time, that we haven't taught them that, but in a lot of ways, as the cost of these programs go up, it is a good alternative that we need to teach the people coming up through the ranks, on how to sell that product.

I've been in industry meetings that there's a lot of gray hair in that room, and there's not a lot of folks that are there in that room that are coming out of college, or show a lot of youth that are interested. I think we need to get them excited, and at the same time we need to start teaching those folks as we retire, and head off into the sunset.

Joey Giangola: Bob, this has been fantastic. I'm going to leave it right there, sir.

Bob Lombard: Yeah. Thank you, Buddy.

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