April 21, 2022
To: GL1 Program Members
From: Gina Dean, CEO
Re: GL1 – Stakeholder Communications
As has been the case for the last several years, the liability insurance industry remains in a hard market cycle, which means another year of significantly higher liability premiums.
The factors that continue to fuel these hard market conditions are varied and many, but they all result in more and larger claims…frequency of severity. You have likely heard staff and Alliant discuss this concept multiple times in recent years, and frankly you may be tired of hearing this phrase. However, these factors continue to drive the same negative results, and we believe it is important to continue providing you the information needed to communicate what is going on, and why, with your stakeholders. The following is an executive summary on the state of the public entity liability market and the status of the GL1 Program. Also attached are talking points that we hope you will find useful in communicating to your stakeholders.
Background
For much of the last two decades, relatively modest loss experience, ample capacity, and sufficient competition among carriers caused an extended soft liability market. These soft market conditions caused declining rates that ultimately were found to be substantially too low to support the industry as loss costs increased dramatically in recent years.
Plaintiff demands, jury verdicts, and claim settlements have skyrocketed, resulting in claims that historically had resolved in the $5M-$10M range now costing public entities and their insurers $20M-$30M+.
There are numerous reasons for the increased frequency of severity, among the biggest being the phenomenon known as Social Inflation. Generally defined as “all ways in which insurers’ claims costs rise over and above general economic inflation,” there are numerous specific factors that cause Social Inflation. These include: overall economic disparity between the “haves” and the “have nots,” the changing composition of jury demographics to millennials who tend to hand out bigger awards; the impact of our digital society where public opinion can be formed in 140 characters or less; plaintiff attorneys’ use of the Reptile Theory to scare jurors into punishing defendants; distrust of police who are often “presumed guilty,” and litigation financing engaged in by over 65% of US law firms driving longer, larger, and more expensive claims.
EXHIBIT 1
GENERAL LIABILITY MARKET ISSUES
Public entities, especially California public entities, are particularly susceptible to what are known as “nuclear verdicts” due to the type of services provided (law enforcement, road design, child services), and their perceived “deep pockets.” Some of the largest closed California public entity claims over the last decade are shown below.
Loss Year Description Total Paid
2021 Sexual Abuse (Class Action) $1,100,000,000
2018 Sexual Abuse (Class Action) $246,000,000
2010 Sexual Abuse (Class Action) $169,200,000
2014 Child Abuse/Foster Care $113,400,000
2014 Sexual Abuse/Molestation $102,500,000
2014 Child Abuse/Foster Care $113,400,000
2015 Law Enforcement/Wrongful Death $85,000,000
2019 Sexual Abuse (Class Action) $73,000,000
2016 Wrongful Death $60,000,000
2012 Sexual Abuse $58,000,000
2015 Strip Search (Class Action) $53,000,000
2015 Vehicle Accident/Sherriff Vehicle $42,000,000
2017 Dangerous Condition/Vehicle vs Pedestrian Accident $36,100,000 2015 Law Enforcement/Wrongful Death $33,500,000
2014 Dangerous Condition/Vehicle Accident $32,500,000
2015 Sexual Abuse $31,000,000
2011 Dangerous Condition/Vehicle Accident $30,000,000
2017 Negligent Supervision/Student Struck by Vehicle $28,500,000 2016 Dangerous Condition/Wrongful Death $28,000,000
2017 Vehicle Accident/Sherriff Vehicle $27,000,000
Losses such as these limit the capacity and availability of reinsurers willing to write public entity business. This is especially so in California, which is widely known as a very litigious and expensive jurisdiction. In fact, California holds the dubious honor of being ranked #1 on this year’s list of Judicial Hellholes published by the American Tort Reform (ATR) Foundation. In their report, ATR cited liability expanding legislation (Revivor Statues, Decedent Pain & Suffering Awards, etc.), excessive tort costs, and lawsuit abuse as the basis for their ranking. Unfortunately, this is not a new accomplishment as our state has been at or near the top of this annual list since it first was published in 2002.
EXHIBIT 1
GENERAL LIABILITY MARKET ISSUES
The components of our jurisdiction that make it difficult for buyers of insurance, also make it very lucrative for plaintiff attorneys; a fact that they are well aware of.
Plaintiff firms spend hundreds of millions of dollars each year to shop for cases in our state, and as shown in the box to the left, that amount is increasing each year.
Additionally, our reputation as being a very difficult
jurisdiction, and the large losses that accompany that
distinction, also precedes us in the insurance market.
Though Social Inflation and other factors have now led to a rise in nuclear verdicts in other parts of the country, it was not long ago that a common phrase used by some liability carriers was “ABC”; Anywhere but California.
The situation previously described has created a significant reduction in the amount of insurance capacity available to California public entities. To illustrate this point, in 2015 PRISM considered 17 reinsurers for renewal of the liability programs, that when combined, had $170M in capacity to offer. Looking ahead to the 2022/23 renewal, seven of those reinsurers no longer write public entity business in California, and the capacity for those still writing business is down to $65.5M.
Carrier 2015
($ Millions)
2022
($ Millions) Carrier 2015 ($ Millions)
2022
($ Millions)
AIG 25 5 Everest Re 5 5
AWAC 10 10 Genesis 5 3
AmTrust 10 0 Great American 10 5
Applied 0 5 Ironshore 10 0
Argonaut 10 0 Markel 10 0
Berkley 5 5 Munich 20 10
Brit 10 0 Old Republic 10 0
Chubb 10 10 Safety National 10 5*
Civic Risk 10 0 Upland 0 2.5
Total 170 65.5
Simple economics dictate that the dramatic reduction in supply coupled with the everincreasing demand for insurance limits result in the pricing spikes that have been experienced in the last several years. Carriers are also seeking to protect their downside risk through coverage modifications either in the form of sub-limits, aggregated coverage layers, higher attachments, certain coverages being provided on a claims-made basis, and/or exclusions. At the same time and for the same reasons, self-insured and pooled EXHIBIT 1
GENERAL LIABILITY MARKET ISSUES
programs across the state are seeing a depletion in funding. This trend is affecting all public entities: counties, cities, schools, and special districts.
As these issues affect the insurance industry, they also affect PRISM. We are experiencing an issue of both frequency and severity of claims. The following table shows the number of large claims in the GL1 Program’s most recent ten-year history, both at their actual reserved value and then trended using a 5% annual trend factor.
GL1 Program – Large Loss Claim Counts
Layer
Incurred
Claims
*Trended Incurred
Claims (5% trend)
XS of 5M 27 53
XS of 10M 14 20
XS of 15M 5 9
In addition to the increase in claims frequency, the following graph highlights the increase in the median value of claims in the Program over the last 10 years. Again, the graph highlights the “normal” inflation of claims from 10 years ago, which changed significantly starting three years ago.
$‐
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
$16,000,000
$18,000,000
$20,000,000
Median Value of
Top 75 Claims
Median Value of
Top 50 Claims
Median Value of
Top 25 Claims
Median Value of
Top 10 Claims
Median Values
10 Years Ago 7 Years Ago 5 Years Ago 3 Years Ago Current EXHIBIT 1
GENERAL LIABILITY MARKET ISSUES
Safety in Numbers
The collective size of the GL1 members allows us to withstand the kind of loss experience depicted above. We are able to leverage our volume to allow for greater self-funding (pooling), and to maintain relationships with our reinsurance carrier partners. We have been creative in our program structure to mitigate the cost increases, and to continue to provide the high excess limits that the membership needs. That being said, the Program will again see moderate rate increases in the coming year, with individual member’s changes varying based on their own loss experience. It is because of our core values and because we are member driven, that we set premiums that are equitable for all members, based on an allocation that takes into consideration several factors including a member’s size, SIR level, increases in exposure, and each individual member’s claims experience.
PRISM’s Response
PRISM has always been proactive in managing the GL1 Program with our market allocation approach to help manage the members’ costs. Over the last several years, the Program has been loss challenged, causing some members to take on increased selfinsured retentions to manage the increase in premiums. Last year, we entered into a new agreement with one of the largest and most stable carriers in the world, Berkshire Hathaway, to provide reinsurance for the $5M xs $5M layer. We also restructured the layers above $10M to maximize the capacity and appetites of our carrier partners in those layers to maintain our standard program limits to $25M. Finally, we secured optional excess limits to $50M to meet the growing need for protection against the ever-increasing claim costs.
The Big Picture
If we have learned from history, we know that joint powers authorities (pooling) have been the answer to turbulent markets. By staying the course, we will all benefit from our economies of scale, our leverage in the reinsurance markets, and our sharing of best practices to help manage risk and hard markets.
While PRISM’s premiums will increase for 2022/23, the premiums are still less costly than an entity would likely face outside of PRISM. Recent membership applications have led to growth of the Program and has also allowed us to test the competitiveness of the GL1 Program. The ten new members that joined GL1 in the last two years saved between 15%-75% on their premiums, which is a testament to the continued competitiveness of the Program. In addition to premium savings, those entities also avoided coverage restrictions and limitations that were quoted outside of PRISM.
Member’s Response
There are several steps that can be taken during these turbulent times.
EXHIBIT 1
GENERAL LIABILITY MARKET ISSUES
1. First, communicate the state of the market to all your stakeholders, so there is an understanding that this is an industry-wide problem. We are happy to participate on conference calls or attend meetings to assist with this communication if so desired.
2. The severity of claims is on the rise. If you are not yet participating in the Optional Excess Liability (OEL) Program, which provides additional limits of liability excess the GL1 Program, consider doing so.
3. Anticipate an increase in your own SIR funding being suggested by your actuary.
4. It may be tempting to consider increasing your SIR to save premium dollars; however, this needs to be weighed against the increased cost to fund the higher SIR. In addition, given these new severity trends, all things being equal, the bias should be toward transferring risk due to the uncertainty of these changing claim trends.
5. Vigorously defend the claims that are defensible.
6. In a hard market environment, the quality of loss data will undergo additional scrutiny. Make sure your data is in good condition.
7. Use PRISM’s recently released data dashboard to review your losses and institute risk control programs, services, and training to address claims trends.
8. Stay up to date on maintenance, inspections and trainings.
9. Finally, manage your individual risk by taking advantage of the best practices programs and service partner programs we offer.
EXHIBIT 1
GENERAL LIABILITY MARKET ISSUES
Talking points for the GL1 Program
Individual Claim Examples
To describe the effects of social inflation on claims, below are several summaries of recent jury verdicts and settlements, many of which involve members of PRISM’s GL2 and GL1 Programs:
A southern California college agreed to a total of $1.1B to settle a sexual harassment class action suit against one of its campus physicians involving hundreds of patients/students.
A southern California school district paid $31M to settle a negligence suit brought by dozens of students who were the victims of sexual molestation by a high school coach.
A jury recently awarded $102.5M to two women who sued a northern California school district for failing to stop a middle-school teacher from sexually exploiting them when they were minors.
Jurors awarded $85M against a southern California county to the family of a man who died after sheriff's deputies restrained him during his arrest. Jurors awarded $45.4M against a southern California county to a girl who suffered sexual abuse for two years in a home where she was left despite evidence showing that an accused molester lived in the house.
A southern California city was sued for dangerous condition of public property after a 16-year-old was struck by a car crossing a street at a crosswalk near his school.
The driver of the vehicle was looking for an item that was on the floor of the passenger seat when he struck the teenager. The teen survived, but has multiple injuries including a brain injury. A jury found there to be a dangerous condition and awarded over $23M against the City.
A northern California county was sued after a family’s vehicle was struck in an intersection late at night by a law enforcement vehicle that was responding to a call without lights and sirens on. Several members of the family were injured, and one young child was left with permanent brain damage. The case was settled for approximately $27M.
A southern California city agreed to pay $21M to resolve a case for wrongful conviction of a man who was incarcerated for 30+ years. A southern California city settled a claim for injuries sustained due to a trip and fall on a city trail for $11.2M.
A southern California city agreed to pay $12.5M to resolve a case in which a driver struck and killed a baby and injured the father of the child. The city was sued for EXHIBIT 1
GENERAL LIABILITY MARKET ISSUES
dangerous condition of public property as the driver claimed his view was obstructed by foliage.
Aggregate Claims Trends
As both frequency and severity have risen for the GL1 Program, just like the general liability industry, the claims trend and lack of capacity will result in anticipated rate increases.
The natural result of this significant change in losses is that PRISM has adjusted forecasts and rates to account for new loss trends, as have our carriers.
The total number of claims in the GL1 Program over $1M in the last five years has more than doubled. This is a big indication of how jury verdicts (and settlements) are increasing!
Benefits of Being in a Pool
Economies of scale benefits
Access to insurance options. PRISM’s size provides more leverage in the insurance market. PRISM has been able to secure unique reinsurance agreements largely due to the Program’s premium volume.
Maintaining broad coverage. Public agencies with stand-alone placements are seeing reductions in their coverage limits and/or exclusions. Although GL1 continues to face the potential for coverage restrictions, PRISM has largely been able to maintain broad coverage in the Program.
Equitability
PRISM’s members with large loss experience have better coverage and premium options in the pool than finding coverage alone, but members with less severe loss experience also receive benefits from pooling as they are recognized and rewarded through premium reductions.
General Market and Program Information
The size of our Program, with over 130 members and more than $7B in payroll, offers great purchasing power to our members and provides much greater stability than smaller programs or individual risks.
The liability market continues to harden. We continue to see a significant increase in plaintiff demands and high dollar liability claims. Jury verdicts (and settlements) are much higher than they have been in years past and that is affecting the industry’s surplus.
There are many factors causing this including tactics plaintiff’s counsel are using (such as the use of the Reptile Theory) to drive up claims verdicts and settlements.
EXHIBIT 1
GENERAL LIABILITY MARKET ISSUES
The selection of appropriate defense counsel, who are experienced in dealing with these tactics, has never been more important.
Markets continue to be more judicious with how and where they deploy their capacity and/or limit their exposure, with some leaving the market entirely. The overall “supply” of limits has been reduced by more than 50% in the last five years.
The size, stability and premium volume of the GL1 Program have attracted markets that may not consider participation otherwise.
We have always been proactive in our management and funding approach, and this remains the same today. One of the strengths of the GL1 Program is the active involvement of the Underwriting Committee and their ability to be flexible. This approach often means modifying the Program structure and the Program's retained risk to keep premiums as low as possible for the members. We are not unique in experiencing rate increases for liability coverage as the claims environment in California and across the nation is increasingly adverse for public entities.
Our membership has increased in each of the last few years with five new members joining the GL1 Program in 2021/22. This shows that the Program is still competitive in the market.
The benefits of pooling shine brightest during a hard market when our economies of scale, our leverage in the reinsurance markets and our sharing of best practices help our members manage risk.
EXHIBIT 1
GENERAL LIABILITY MARKET ISSUES