Insurance: Weakness in the Front Line of Fiscal Defense

This session will explain how public agencies have insured against their liability claims through risk-pools - pooling funds and sharing risk across many agencies. California's  risk-pools did not anticipate the costs of retroactive claims associated with the change in  the statute of limitations for childhood assaults. This has led to a huge liquidity gap for  the onslaught of new claims, among other coverage limitations. Panelists will address the state of the risk-pool landscape, specific limitations of risk pools to settle claims individually and collectively, and their expectations for a massive cost gap that will be absorbed by the general funds of all pool participants.

Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.

Michael Pott (00:08):
So good morning everyone. Thanks for having us. I'm actually going to let Dave start this conversation off by talking about pooling in general. We're going to cover a number of different things, including what JPAs are. How many of you have heard of JPAs before? Okay, a lot of hands, so that's a good thing. Dave and I obviously come from the JPA world. So we're going to talk a little bit about JPAs and how they're involved in the public entity risk financing piece of this whole puzzle. And then we will have a little bit of a recap on what Mike talked about with respect to AB 218 and AB 452. And then John's going to talk a little bit about the insurance and reinsurance landscape because that's the stuff that you don't necessarily see. Those are the amounts of money that entities are spending that aren't really obvious to the general public.

(01:08):
They're not really obvious to the jurors when they're awarding these large amounts or driving up settlement values with the plaintiff's bar. And so we'll talk about the insurance and reinsurance landscape and how that has changed really dramatically over the last 10 years. And then we'll conclude by talking about how we're going to move forward—some of the risk management and risk financing ways that we've been looking at to try to do that, including some of the discussion. There were some questions at the end there about legislation. So with that, Dave's going to kick us off talking about JPAs.

Dave George (01:47):
Great. Thank you, Mike. So a little bit of the history: most of the JPAs in California were started about the same time. This is a Time Magazine cover that hangs in our boardroom from 1986, but it was an insurance crisis during that period of time, acutely for public entities specifically. It is the advent of a lot of the risk pooling that began in California for public entities. And the landscape really is within California, unless you are the largest of public entities, you participate in some type of risk pool for some version of your insurance coverage.

(02:31):
Again, it was a response to an acute insurance crisis that was occurring. It really started in the early 80s. Some of the risk pools started as early as the late 70s, but they really took off with the insurance crisis. So we were formed in 1986. That was a pretty common period of time, but in the mid-80s, the risk pooling for government entities really took off. So we'll talk a little bit about the structure as well, but as you see there, really for the past 45 years or so, this is how public entities organize their insurance structures. Property, liability, workers' comp, employee benefits—all of those things tend to run through these risk pools. And again, unless you are one of the largest entities, and then you may self-insure completely on your own, but otherwise you are within these. And just for some context, there are 58 counties in California.

(03:35):
There are 1,000 school districts. So when you think about the scale, Mike talked a little bit about Los Angeles Unified, the largest school district in the state, but of the thousand school districts, the average size of a school district in California is about 2,000 students. So it is really a very local control model that we have in California.

Michael Pott (03:59):
And Dave, as you know in this slide, JPAs tend to be a little more specialized. So you'll have JPAs that are for schools—Dave's JPA is for schools only—and then you'll have other JPAs that are cities only. There are quite a few different cities' pools and schools' pools. The organization I'm with, Prism, used to be called CSAC Excess Insurance Authority. We changed our name about five years ago, but it started out as counties only. We have about 54 of the 58 counties in one or more of our programs, and then about 70% of the cities, as well as about 15% of school districts in the state. And so we're able to come at it from a much broader perspective between Dave and myself in looking at what the impacts of AB 218 are.

Dave George (04:52):
And then a little bit about the structure. Mike had mentioned earlier in the prior session that it's a mutual risk sharing. So there is—and it's important to remember through the history—it is joint and several liability among the membership for its entire life. And so that's why things like AB 218 have had a significant impact on that. It is essentially a cooperative insurance program at its basis, and it is a contract among the public entities to insure each other. And again, in a joint and several idea. We will talk about a couple of things about why that benefits it; there are some pros and cons about that joint and several piece. It's important to remember it is not insurance. While that has some legal distinctions from the insurance or coverage backend, it is an important distinction that it is self-insured risk pooling.

(06:00):
It is not to say that groups like ours do not go to the commercial insurance and reinsurance markets to backstop the coverage that is provided. But in and of itself, again, these entities are not insurance entities.

(06:18):
So there is not an insurance policy issued; there is what we call a memorandum of coverage. One of its benefits is that the membership then can tailor that coverage to meet the needs. This comes back to what Mike mentioned, which is we tend to organize by the type of entity. Schools tend to be within their own risk pools, municipal entities tend to do theirs sometimes with counties, special districts, etc. So that also then helps you tailor the coverage for the type of service that you are providing. And then we are funded through contributions. So that is actuarially determined, and that is how the funding has worked since the beginning. Public entities—and this is not true across the country, though most every state allows some sort of risk pooling—in California, we are not-for-profit entities and we are in fact our own public agencies.

(07:24):
I'm going to turn this over to Mike, and I know we talked a little bit about this in the prior session, but Mike, if you want to run through this.

Michael Pott (07:30):
Well, sure. Thank you. So AB 218, as Mr. Fine mentioned earlier, became law January 1st, 2020. By the end of this day, you'll be tired of hearing about this, I'm sure, but I want to give you a brief recap just so it's in our minds as to what the revivor statute did. It was a revival statute for victims of childhood sexual assault. That's what it was limited to at that point in time. It created a three-year window where basically there was no statute—i.e., they were able to go back and look at any claim in the history that hadn't been litigated to finality as of that point in time and allowed victims to bring those claims forward. For example, if someone had filed a claim back in 2000 and it had gone all the way through a settlement, then their claim was done.

(08:21):
It could not be revived. However, if somebody had filed a claim in 2008 and dismissed it without going forward all the way through the litigation process, then that's an example of a claim that could be revived. And across the board, we've seen claims—Mr. Fine mentioned earlier back to 1940. Dave, what's the oldest claim you have?

Dave George (08:46):
Well, we were formed in '86, but we do get claims still sent to us. And I think our oldest is 1967.

Michael Pott (08:53):
Yeah, and ours is 1972. And again, when Dave mentions their oldest is 1967, remember from what Mike Fine said earlier: pools didn't exist back then. And so there wasn't a matter of being able to pool your risk back then. Each of those claims belongs with those entities. We were formed in 1979 at Prism, and so we have some members who've been with us since then. If they had a claim from 1979 on forward and were a member at the time, then that would be a claim that ends up in our pool. But anything before that would not be and it's something that the actual entity has to deal with on its own. So that was one piece of it—the three-year window which, as Mike mentioned earlier, allowed for a lot of this litigation to happen. I know from my perspective at my organization, we didn't see a lot of claims in the first couple of years of that window.

(09:51):
In reality, it's because the plaintiff's bar was focusing on schools. They started with the Boy Scouts and the church and those big, big claims, and then they targeted the schools. It wasn't until the end of that three-year window when we started seeing counties and cities being targeted a little bit more. And those are the ones that have kind of trickled in over time. I think it's also why we're also now seeing more of these claims in these extended statute of limitations periods. One of the other things that this statute did was it moved the prior statute of limitations from the age of 26 to the age of 40 following that window. It used to be, prior to 2019, that once you were eight years over the age of majority—basically 26 years old—you would no longer be able to bring a claim for sexual abuse and molestation that you incurred while you were a minor.

(10:53):
That was the law for many, many years. There was a little exception if you didn't discover it through counseling or some other sort until later in life, then you had a period of time in which you could bring that claim. But those claims were few and far between. With the change in 2020, that extended the timeframe up to 40 years. And so someone would have an additional 14 years of time to be able to bring that claim, which in the grand scheme of things is a big period of time when we're looking at evidence and witnesses and folks who are able to testify about whether something did or didn't happen. And then as Mike mentioned earlier, we're one of 33 states that enacted a revival statute during that similar period of time. As they also mentioned, many of those other states have tort caps.

(11:43):
We do not. So it's a little bit different impact here. And then AB 452 actually extended it even further by saying that as of January 1st, 2024, there is no statute of limitations moving forward for any sexual assault claims that occur after that date. So that's what we're going to see into the future now—there's no limit whatsoever. So someone will be able to come in 50 years from now, 60 years from now and file a claim for sexual abuse and molestation. Highly likely there won't be any evidence available. There won't be any witnesses available. So 50, 60 years from now, if somebody's not done something to address this, we're going to be dealing with those same issues that unfortunately our public entities are dealing with now.

Dave George (12:28):
Before we move to the next slide, I just want to emphasize the three-year window Mike Fine had touched on. Our experience has been very similar. Of our current claim count, we had only received about 45% of our claims in that three-year window. So we had less than half of what we have today. The length of time that this is playing itself out has been much longer, I think, than even the crafters of the legislation anticipated in the beginning.

Michael Pott (13:01):
Yeah. And AB 218 is what we're talking about here today from a funding standpoint, but the reality is this is just a microcosm of what's a much bigger issue across California in general—the size of verdicts and settlements that we're seeing throughout the state. It's also a national issue. There've been studies that have been done across the country on what they call nuclear verdicts, which are verdicts of $10 million or more. Sadly, we're also now talking about—and I think John's going to talk about it later—thermonuclear verdicts, which sounds bad, right? Nuclear verdicts are $10 million or more. There've been a couple of studies on it, but we're seeing those claims, not just in the sexual abuse and molestation world, but also in just regular claims.

(14:00):
Slip and falls, dangerous condition of public property cases where a tree limb falls on a car and somebody gets injured really significantly or sadly passes away.

(14:14):
It's impacting the industry across the board. When John talks about the impacts later on to the insurance and reinsurance industry, you'll see that impact. I know Mike mentioned earlier the idea of being able to break out insurance and how much we're charging for AB 218 claims. The reality for an organization like mine is our premiums aren't calculated based on that. We don't go out to the insurance market and ask reinsurers, "How much are you going to charge us for AB 218 claims?" or "How much are you going to charge us for sexual abuse and molestation claims?" When we get a number, that number is for all of the tort liability that we have. So while in a perfect world it'd be great to be able to tell you exactly what the extra charge is because of AB 218, it's going to be almost impossible to do that because it's baked into all these other claims as well. I don't know if you have any thoughts on that, John.

John Chino (15:14):
Actually, it is becoming segregated at this point. We are seeing insurance pools bifurcate the coverage for childhood sexual assault or sexual abuse and molestation, and they will know exactly what it's costing.

Michael Pott (15:36):
Interesting. And is that when my carrier forces them to go in that direction, basically?

John Chino (15:42):
Not always forced by the carriers. Sometimes the pool sees an advantage in bifurcating the CSA coverage, maybe for underwriting reasons or for a more focused response in respect of litigation management.

Michael Pott (16:01):
Excellent. Well, thank you for that. One of the other things that we see that's out there in the industry is something called third-party litigation funding. Has anybody heard of third-party litigation funding? No hands on that one. Okay. So this is something that you probably will start to hear more about. It's not widely out there in the public, but it is an issue that we're seeing in litigation circles and in the insurance and reinsurance circles. Basically, what it means is that private equity companies are investing in lawsuits and funding them to their conclusions. They can be doing that in any number of different ways. They can invest in a particular firm, they can invest in a particular claim, or they can invest in a portfolio of claims that are all pulled together.

(16:54):
Unfortunately, we see the impact of what happens. I have a former partner who had a case going to a settlement conference a couple of months ago. They were talking about settling this case; he thought the number should have been around four or $500,000. It was a fair, reasonable settlement. What he found out from the mediator during the course of the mediation was that at the very beginning of the litigation, when the plaintiff's attorney had first signed this plaintiff up, the plaintiff was connected with a third-party litigation funder who basically gave them $500,000 upfront for their claim and was going to charge some exorbitant interest rate on top of that. So when it came time for the settlement conference, the plaintiff was going to have to recover over a million and a half dollars to even just pay off that "advance."

(18:00):
And so that's what's happening out there in the industry: there's no regulation in that space. These third-party litigation funders are able to invest heavily and make 15, 20, 30% back on their investment. That's why it's actually seen as an investment tool that's even better than investing in the stock markets. Additional problems we see with this is it's basically allowing outsiders to secretly use courtrooms as a trading floor. They're putting their money out there and banking on the fact they're going to get more than they invest in. Through that process, it's encouraging the incentivization of filing non-meritorious litigation because they know if they put enough money into it, eventually it's going to result in some sort of settlement because the defense is going to be so overwhelmed with having to expend money that they're going to end up settling it for some amount.

(19:09):
The big thing that we see is what I mentioned a minute ago with that individual who had taken basically that $500,000 out on the front end. It allows funders to exercise undue control or influence over the litigation, when in reality, they shouldn't have any part in that. It runs against legal ethics where the attorneys are supposed to be ensuring that everything's being done in the best interest of their clients. Instead, you have this third party over here that's helping direct traffic and make decisions on whether a case should settle and for how much it should settle. And then last but not least, there's issues with funders often being paid before the plaintiff. And I know you hear "national security risk." A couple of studies have shown that other countries are investing heavily in third-party litigation funding, in part to help undermine the legal system here in the United States because the more it drives up the settlement values of these cases, the more that there is this unease across the country in what is fair, what is reasonable, and how come the person over here in this state got $500,000 for the same injury that over here somebody got $10 million for?

(20:22):
And we see that in the sexual abuse and molestation cases too when Mike earlier talked about one case settling for $9 million for three plaintiffs, another one settling for $50 million for one plaintiff. Now, there're different things that may have happened to those individual plaintiffs, but the reality is I could take two claims, depending upon who the attorneys are, that were exactly the same and one claim might settle for a million and one claim might settle for seven million. And that creates all sorts of challenges with respect to trying to figure out what these claims are actually worth.

Dave George (21:00):
So Mike Fine had mentioned earlier in the pieces, as you can imagine, defending and settling these claims come with a lot of their own unique challenges. We are in the business of settling claims and for both Mike Pott and myself, very large claims. That's part of the normal process in our worlds. But as you can imagine, you're trying to deal with claims that are decades old; your witnesses may not be around, they may not be alive, and certainly anything that would amount to evidence is probably not there. And then just the legal landscape. Obviously, these are very sensitive and emotional claims. So it comes with those extra layers of complication in terms of trying to come to a monetary settlement. And then Mike had mentioned 137 million here. You start to get lost a little bit in the numbers of how large they've gotten, but that 137 is the same claim that he had talked about.

(22:07):
And there was a second one for 102 that was also for two persons. And so as you can imagine, what that does is create a significant inflation factor instantly for all claims going forward. That's essentially the bottom line of what those types of outcomes do as you're trying to work through a backlog of claims coming in.

Michael Pott (22:31):
And sadly, we all know in the industry, when we see one claim settled for a certain amount, we know the next mediation we go to, the plaintiff's attorney's going to have that right there, and that's going to be their demand. Regardless of the facts of the case, regardless of what's being alleged, they're going to be using that number as the baseline for their settlement discussions, which is another reason why these values have increased so dramatically. 20 years ago when I was litigating these cases, right or wrong, back then the value of those cases—a similar case this year would probably be $5 million—back then, it would have been $100,000. And that was even as recently as 10, 15 years ago. But during these last 10 years, the claim values have increased exponentially.

(23:29):
Without statute of limitations, the issues that Dave talked about are going to continue to exist. There hasn't been anything yet. For example, counties with juveniles—there're records that they may have had but were destroyed because the law required those records to be destroyed. There hasn't been a solution to that thrown out by the legislature or adopted to correct that problem. So this is still going to be a problem in the future. Finding witnesses to be able to come in and testify when 30 years is maybe a career for a teacher—they're able to retire at that point in time. How many witnesses are even going to be around? And then you have to go and locate them if they're still around or alive to be able to bring them in as witnesses. Very few documents, and if you don't have any documents, it's going to be hard as well.

(24:24):
And all these challenges lead to these entities unfortunately being forced to settle claims for much larger numbers because if you don't have witnesses and you don't have documents, you don't have much of a case. There's not much to put up there on the stand to say, "No, this didn't happen." We've seen some cases where the plaintiffs don't even know. They can't even testify as to who actually was the abuser. They just have said that it happened while they were attending X school or while they were in custody with X county, but they don't even know who the person was. So how do you defend that case if you're the entity?

(25:06):
One of the things that has come from all this is the cottage industry of what we call insurance archaeology or insurance policy archaeology. Dave mentioned earlier that his pool started in 1986. We started in 1979. So we have entities that tender their claims to us knowing that the claim occurred long before our pools were formed. What do they do in those situations? They may have had insurance, but they may or may not be able to find those policies very easily. So this industry of insurance archaeology has been created where this group of people will go out and look and dig through old policies and try to figure out what coverage might have existed for a public entity, and then figure out who to tender that claim to. The unfortunate truth is that many of the carriers that may have been covering those claims 30, 40 years ago aren't in existence anymore.

(26:08):
Whether they went bankrupt or whether they just ceased to exist, they're not there. And nobody expected them to have to pay a claim 30 or 40 years later. It's not their fault; the business model wasn't wrong. It just was not in anybody's mind that something like that would happen.

Dave George (26:30):
And some of the other aspects—Mike Fine had touched on this as well. If you've got access to old policies and you're getting claims that old, that's the first potential cost. Then back to the entity itself, largely through self-insurance and then pooled risk as we've talked about, which largely began in the 80s, that was still largely self-insured. Remember, there was an insurance crisis going on. So this was an old self-insurance platform. And the next pieces are what make pooling unique as opposed to a commercial insurance product: the funding mechanisms. Remember, these are not-for-profit public entities, so the goal traditionally has not been to create a capital base of billions of dollars. These are self-funded models, actuarially determined. You keep reserves, but within actuarial models. They do not lend themselves to creating an enormous capital base without the actuary being able to justify why you would be keeping those funds.

(27:51):
So pools have two mechanisms. One, they can rebate overage, if you will. So if you collect too much, you can return that as dividends. That occurred in our case over several years. And then the second piece is assessments. And again, remember: joint and several liability. Coverage up until now applies to the year in which something occurred. As these claims come in, then you create an assessment and you go back to the membership. So if you have 20 claims that all of a sudden now have come in from 1990, you have to go collect the funds to pay for those claims. And so that is the process going on right now with several pools, us included—which is you go back, find out who all your membership was in 1990, allocate a cost to that year, and you assess them dollars.

(28:51):
And so as Mike Fine had mentioned, this is regardless of whether you as a particular entity have actually had any claims—you are still having to fund the overall settlements. That's the other mechanism that makes them unique, this ability to assess.

(29:17):
And then just prospectively, as you can imagine, rates are going up in the mid to high double digits, and they've really been doing that for five or six years. It is not just the abuse claims, but it is, as Mike Pott mentioned, across the board: claims of all kinds, the larger tort claims, the settlement values are increasing exponentially, and that has been a trend in the last several years. So it is not just about this one type of claim, but there are others that are seeing similar effects.

(29:56):
The commercial and reinsurance marketplace is essentially tracking the same in terms of how they're responding and the types of increases they're looking for. As I often tell my board, insurance, the way it's structured, you look to the past to try to predict the future. I will raise your rates as long as I feel like I know what my target is. If they lose the ability or they think they've lost the ability to predict the future, that's when they begin withdrawing. And we are in that phase at this point. They will do their best to attempt to predict; when they feel like they cannot do that any longer, that's when you start to see retraction in the insurance marketplace.

(30:58):
And then lastly, at least from our end, a little bit on funding. We've talked a little bit about this. Again, you go to your historical insurance policies—and I worked in risk management for a large school district for a long time—and I would tell you the insurance policies that you see from the 70s and the 80s, even for a large entity like a school district, you might have had a $500,000 liability policy. So that doesn't go very far in the types of things that we're seeing now. And just remember, we were talking about occurrence coverage. These policies are responding based on when the event occurred, not today. It's not the day the claim came in, it's the day they allege the tort happened. This is why you're going back to your policy from 1978 to see what sort of coverage you had.

(31:58):
Obviously, JPAs have been around since the 80s, so if it's within that timeframe, they come to us. Limits have certainly been an issue. Mike mentioned on that very large nuclear verdict, that was a significant issue. And then it goes back to the general fund. And then again, part of our topic today is about what the financing options are post-verdict.

(32:31):
So we're going to turn this over to John who's going to talk some about the insurance landscape and what public entities generally are facing in California.

John Chino (32:41):
Thanks, Dave. Thanks, Mike. So in talking about the impact to the insurance industry, I want you to think about this for a moment. We're just talking about AB 218 and California, but 33 states also have a similar reviver statute. So this meeting could be held right now in 33 different states. From the perspective of the insurance industry, that's really important because those 33 states probably represent like 90% of the population of the United States. If this was just an issue in California, the insurance industry could shrug it off. But the fact that 33 states—the cities, the counties, and the school districts—have nearly the same issues that Mike Fine spoke of and that my colleagues up here spoke about, that's the impact to the industry. I want to share with you some nuances about that, but also how it will impact what is going to happen to the joint powers authorities and the other self-insured public agencies here in California and throughout the other states.

(34:02):
Mike Fine made a great point about this. There's a good reason why 33 states changed their law and have a revival window: it's to help victims who didn't get their day in court and to help them get their lives right.

(34:22):
Pooling is an alternative risk financing option. In my opinion, it's the most successful, greatest alternative risk financing option of all time. As Dave George pointed out, it started really in the late 70s and flourished in the mid 80s, but also during that time period, public agencies and private entities also found relief through different types of alternative risk financing: self-insurance, group captives, things of that nature. But irrespective of which particular solution they chose, insurance, excess insurance, and reinsurance were still the important foundations they had to have. SELF and Prism, two very strong organizations—two of the largest in the entire United States—have had excess insurance and reinsurance throughout their entire existence; they could not get by without them. As challenges exist for them, they also exist within the industry. They get passed on. Now, this is a very simple diagram of how excess insurance or reinsurance would work in an alternative risk financing option.

(35:46):
The way you read this particular slide is at the bottom, the red represents the self-insured aspect of the entity itself. If we're talking about the Schools Excess Liability Fund, the fund would be the amount that Dave collects from his members to pay for claims, and that figure is provided to him by the actuary. Then he has an insurance broker, someone like me, who goes out to the reinsurance market or excess insurance market and places excess insurance coverage, represented in this scenario by the blue rectangle and then by the green. The blue underwriters are pretty safe because they are going to get to—and Mike, I like the way you put it—wrap everything up and work out the pricing based on all the coverages, and they're going to get a pretty healthy premium. So when something happens like a revival law, they still have a pretty good premium that they collected, even though it was years ago.

(36:58):
Obviously, they did not price into their premium a change in the law. There's no way they would've known that. But the portion of the industry that is particularly hard hit in this revival window scenario is represented by the green. For right or wrong, these underwriters, because they don't have enough—the law of large numbers doesn't work for them. They just don't have enough claims data to rate losses. They use a derivative method by taking a percentage of whatever the primary underwriter is writing, the blue underwriter. And so they may have collected 10% of what was collected. If they had a hot tub time machine and they could go back in time, they would know that 10% was not enough. They should have collected 50 or 60, but at the time, 10% was an adequate figure. So these insurance companies—the companies that wrote the excess, whether for SELF or for Prism or any of the other 500 self-insured pools in the United States—they're the ones getting really hammered because the premiums they collected were very low and no one could have foreseen claims of 135 million or even 10 million back at the time they wrote those policies.

Michael Pott (38:25):
And John, it's a great point because you had carriers who were writing those coverages who had never seen anything close to those ranges. You had a carrier who might've taken that one million to $10 million layer and that was, like you said, a small premium, but the highest claim that pool had ever had in any of those years was $400,000. It was a pretty strong play by the insurance company where they thought they would not get hit with a claim at all. That's the big wildcard of these revivor statutes: they're talking about 2025 dollars, unfortunately, on 1970 claims.

John Chino (39:09):
It is the big wild card and it is the impact. The other point I would make is—and you're keenly aware of this—there are over 5,000 insurance companies in the United States. The United States is 27% of the entire world market for insurance. But when it comes to the companies that will insure organizations like the two represented up here, there's something in the neighborhood of 50 or 60 in the entire world. These JPAs use worldwide capacity—they go to Europe, they go to Bermuda, they go wherever they have to go—but it still comes down to those same 50, 60, or 70 companies that are paying the claims because of the revival laws, whether in California or a different state. So that pool is being very negatively impacted. Now, this is some data on what is expected.

(40:11):
As Dave pointed out, the cost of premiums is going to go up and the amount of capacity is going to go down. In respect of underwriting expectations, things have changed. I'm in my 43rd year of doing this, and in the prior years, we completed an application that talked about sexual abuse and molestation prevention. Now, I'll bet both of you have had to sit down across from underwriters and talk to them about what your members are actually doing in respect of sexual abuse and molestation prevention.

Michael Pott (40:47):
Oh yeah, for sure, John. Every year, when we go and meet with 20 to 30 different underwriters over the course of the year, that's number one on their minds: what is your pool doing across the board to mitigate risks, but especially in certain areas such as this and law enforcement.

John Chino (41:08):
Thank you. As you would expect, because they don't have the hot tub time machine and they can't go back and recollect those premiums, now they know. They know that this can happen. So some companies just said, "We're out." Other companies have said, "We'll continue to write childhood sexual assault, but we're going to provide a finite limit of coverage and charge a much higher premium." It doesn't matter to us if you change the law—our limit's not going to change, and we've charged what we think is an appropriate premium for it. Or they may change the terms and conditions of the policy to put more onus on the client, the JPA, saying you have mandatory loss control, or you may have a much greater self-insured retention before they're asked to pay any claim that attaches into their limit.

(42:06):
This is another thing that will be very familiar to my colleagues here. Back in 2000, as a broker, I could place a hundred-million-dollar limit of liability coverage for a client with one single carrier; AIG or Chubb would write the whole thing. Fast forward to 2020, and it would take four carriers to put together that same 100 million. Now, just four or five years later, it takes 13 or 14 carriers because they've learned their lesson—they've learned that the laws can change, the rules can change, and they're only going to put up a small limit going forward to make sure they've got the downside of the risk managed.

(43:00):
This is a slide that was put together by the reinsurance division of our company, Gallagher Re, and it relates to the overall capacity they are placing and the cost of that capacity. The reason I wanted to share this with you is this is only five years of history, going from 2018 to 2023. This is really the time period where everything has changed. In our industry, we have trends and sometimes we have an aberration—something happens and then things go back to normal. Certainly, one of the biggest trends we had was the formation of pools in the mid-80s, which created a shift in how all public agencies would have coverage for the claims they have. I think we're at that point again, and I think this slide is evidence of that because what's happened in the last five years is the amount of capacity available to self-insured pools like these two—and again, there are 500 in the United States—went down by about 23 or 24%, no matter how much they wanted to pay for it. At the same time, the cost of those limits went up 131%. When you put those two things together, the real cost for them would be about a 400% increase in just a five-year period. If they want that security for their members, they will have to pass on the cost of that security to their members.

(44:45):
One of the things you have to be good at when you're in the insurance industry is being nimble and playing the cards you're dealt. The laws have changed. They're not going back. This is the way it's going to be. So the insurance industry certainly wants to continue to be the security for joint powers authorities and self-insured public entities going forward. In order to do that, I've talked about things they have to do: raise their prices, change their terms and conditions, and increase the amount of self-insured retention that the pools will pay before their attachment comes into play. But another thing they're doing—we call it a vertical layer—is where essentially you get 14 or 15 different insurance companies that all share that primary layer.

(45:53):
For each and every claim, instead of the first company paying the full amount of the loss and the excess company paying some portion, all 14 or 15 companies share in the claim at a very small percentage. This provides a much greater level of sustainability for pools like SELF and Prism. If one or two of the insurance companies in that vertical layer say, "I don't want to provide childhood sexual assault coverage anymore," it's easier to replace them. This is a way we can move forward and still provide the security that the joint powers authorities need. Now, another unintended consequence of the change of AB 218 is that whether it's a city, a county, or a school district, they use thousands of contractors, suppliers, and vendors. They're in the business of providing law enforcement and roads or education—they don't have every type of professional working for them, so they have to hire outside professionals all the time. They were able to have indemnification from those contractors, suppliers, and vendors that included childhood sexual assault until about three years ago.

(47:01):
Now it's available for some of the larger entities, as is pointed out here, but not for some of the smaller entities. The impact of that is if the social worker can't provide the childhood sexual assault coverage in that contract, they still have to have the service. It just means the indemnification is now moved over to the pool. In addition to paying more for the reinsurance and excess insurance they need and having a higher self-insured retention, they have less coverage being provided to them through the vendors, contractors, and suppliers working on behalf of their members.

(48:13):
Mike, I can imagine there were many times in the past where you would've had a childhood sexual assault claim and you would've had, say, two or three different insurance companies there at the table because one would've been representing the contractor and one would've been representing the supplier and one would be Prism, and going forward, it's just going to be you.

Michael Pott (48:37):
Yeah. It's been a big challenge with entities because they have seen, for example, the foster care system. There was a company that counties work with to try to help place the kids in foster care, and that whole industry had to go to the legislature last year and basically ask for help because they couldn't get coverage anymore in this space. You kind of understand why with what they're dealing with—that's probably their main risk—but that's a big deal. But it's not just those. It trickles down to even smaller entities. Think about a city and their parks and rec district, where they have events on their sites—after-school special things for kids, events like that. Those small "mom and pop" groups that put those things on can't afford coverage or find coverage.

John Chino (49:40):
Right. I don't have a crystal ball, but when it comes to the needs that you have, I believe you'll be able to continue. It will be more expensive and there'll be different terms and conditions, but you'll be able to continue to find reinsurance security. These organizations will not. This is the way it's going to be going forward.

Michael Pott (50:00):
And as you point out, then that risk is back on the entity, which ultimately falls on the pool.

John Chino (50:04):
It's back on the entity because we can't cancel foster care—it's a service that has to be provided. It just means that your member's going to have to take on the risk, even though they're not running that operation. My last slide: I just wanted to say that we have seen—and Mike Fine mentioned this as well—that the focus going forward for Prism and for SELF is prevention. We've never been at a time when more is being done in respect of prevention than right now. We are seeing with the "Big Six" social organizations—Boy Scouts of America, Boys and Girls Club, YMCA—that it is amounting to a reduction in the frequency of childhood sexual assault events. And then I think, Dave, we're back to the final slide, transforming the trend.

Dave George (51:20):
Yeah. As Mike Fine had mentioned earlier, through FCMAT's help in the report that was issued, the state passed legislation on the prevention side. School districts are doing a lot of good work around prevention, but a reminder that there are a thousand school districts. Trying to get everyone moving in the same direction on a level playing field was instrumental in creating a baseline for everyone to work from. A lot of the things you see up here are pieces of the puzzle. The training and awareness piece is a significant focus of the K-12 school environment currently, and it's a work in progress. These things take time, but there is a lot of work going on around that. The science is also developing.

(52:26):
Five or 10 years ago, there was little to no research on incidents of childhood sexual assault, believe it or not. You didn't even necessarily know exactly what you were—the "stranger danger" thing that maybe we all grew up with is not the dynamic that science is showing occurs in reality. That is also going to help us focus on appropriate measures that are effective and can continue to reduce this, because again, no one in the room thinks this is not a problem; it's a systemic social issue. We've been reading about this for decades, and I think that's part of what we're seeing in jury verdicts and public reaction. People are tired of hearing about this. There's a lot of good work going on, but it's going to take time.

Michael Pott (53:26):
As Dave said, and as Mike said earlier, none of us are up here saying that victims don't deserve to be compensated. Victims absolutely deserve to be compensated. The challenge we all face is going back to figuring out what is reasonable compensation, because we're now creating generational wealth through jury verdicts that wasn't an issue in the past and didn't drive the motivation of jurors—but now it does. That's where I think the legislature's going to be necessary to come in. When legislators see $4 billion being settled to pay for claims from LA County and another almost billion dollars for LA Unified, they see there's a problem. It's just a matter of what can be done. We have time for a question. Any questions?

(54:34):
All right. Well, thank you, Dave, Mike, John.