Arkansas should create its own special purpose insurance company to stem rising property insurance premiums for public schools and postsecondary institutions, a consultant hired by the state Bureau of Legislative Research said Wednesday in a report to a legislative panel.
Arkansas should initiate its own “special insurance system that keeps all losses within the annual loss estimate while allowing sufficient premium and investment income to cover all anticipated claims and reinsurance costs,” Meadors, Adams & Lee Insurance Co. of Little Rock said in his 85-page report. The consultant said that a captive insurance company is a company whose main purpose is to finance the risks of its owners or participants.
The state’s use of three programs to purchase insurance “within expected losses” is not efficient and sustainable, the consultant believes. Two of the programs are administered by the Arkansas Department of Insurance and one is administered by the Arkansas School Boards Association.
The Arkansas Public School Insurance Trust governs 78 school districts, and the Arkansas School Boards Association covers 177 public school districts.
The Arkansas Multi-Agency Insurance Trust covers higher education and other state property.
A state insurance company that charges the same rate per $100 of insured value is a fairer model for all schools, both large and small, the Meadors, Adams & Lee Insurance Co. report said. The “concentration of higher-value schools” necessitates a higher insurance limit of $2.5 billion, the consultant said.
The consultant recommended capitalization with a minimum investment of $200 million of government funds in the state insurance company and structuring the company to retain the first $50 million of losses and protect the capitalization with “collateral insurance on that retention.”
The consultant recommended setting reinsurance above retention to a minimum of $2.5 billion. This is necessary to protect against a tornado outbreak, where one or more large tornadoes take a direct path through the highest risk concentrations, resulting in catastrophic damage to multiple properties spanning the largest high school and/or college campuses, and greatly increasing restrictions over current programs and provides more insurance for lower premiums, the consultant said.
The consultant recommended charging a sufficient premium to the schools to cover annual expected losses and reinsurance costs, creating a policyholder surplus to be invested and paying claims.
Current program premiums are $86 million, compared with $75 million under that recommended structure, Meadors, Adams & Lee Insurance estimates.
Sen. Jonathan Dismang, R-Searcy, said there is a lot of common sense in the consultant’s report, but the strongest lobby in state government is momentum.
“From here to where?”
Sen. Terry Rice, R-Waldron, co-chairman of the state Legislature’s Executive Subcommittee, said there are both “common sense things” and “complicated things” in the report, and it’s clear the status quo won’t work. There will likely be a meeting to further discuss the report during the fiscal session that begins on April 10, he said.
The board hired the $50,000 consultant last fall after approving Republican Gov. Sarah Huckabee Sanders’ requests in July for $11 million in one-time funds to help school districts pay for rising property insurance premiums.
The board approved the governor’s requests for $11 million from the state’s restricted reserve fund after she announced the state would cover 30 percent of the cost of increased premiums for public school property insurance and blamed insurance companies for the large increase in premiums, saying, that companies are trying to take advantage of already financially struggling public schools.
Last year, state Insurance Commissioner Alan McClain said rising school property insurance premiums were due to “a confluence of factors — poor claims experience, difficult insurance market conditions and a negative outlook from weather patterns.”