Municipal Risk Pools 101

In this era of police reform, the cost of misconduct settlements is a significant aspect of the public conversation around law enforcement. Coupled with this is a heightened awareness and concern about officer injuries on the job and the persistent and potentially costly effects of mental health challenges associated with the profession — like PTSD. Agencies manage these risks via policies and procedures, many of which originate from municipal insurers and risk pools. This makes risk management a critical operational and strategic concern of government agencies and a financial management issue as well.

The Association of Government Risk Pools (AGRiP) estimates that as many as 80% of municipalities participate in one or more risk pools. Similar to commercial insurance, these entities provide coverage in the event of lawsuits and help law enforcement agencies craft policies that reduce their risk exposure. However, they differ substantially in the way they operate and the services they provide. This article will explore how risk pools came into being, what they do for municipalities and law enforcement agencies, and their broader role in the reform landscape.

A brief history

The rise in the prevalence of municipal liability insurance is commonly associated with the Monroe v. Pape Supreme Court decision in 1961. The case began as a civil rights complaint involving a law enforcement search and interrogation, with the plaintiff alleging the deprivation of constitutional rights. The Court’s decision held that a municipality could be sued for damages related to the denial of constitutional rights.

This change in the interpretation of the law opened a new area of liability for cities. While the case itself was focused on a civil rights issue involving policing, the decision also impacted facets of government like school allocations and business licensure, to name just a few. To mitigate the impact of this new avenue of liability, municipalities looked towards the commercial insurance market to provide coverage against lawsuits and settlements.

Through the 1970s, a majority of municipalities carried commercial insurance. Beginning in the mid-1970s and accelerating in the early-1980s, a crisis in the municipal insurance market led to a period of substantial insurance cost instability. Reinsurers were folding rapidly and rates paid by cities grew dramatically as the market contracted from the supply side. The causes of the market disruption are still debated today, but the result of municipalities shouldering the burden of untenable premiums for their insurance led many to seek out alternative sources of coverage.

Risk Pools Emerge

Intergovernmental risk pools gained traction as commercial markets experienced their collapse in the early 1980s. In practice, they function much like commercial insurance companies. Cities, counties, or other government entities group together to pool their risk to diversify it and to control costs. By managing risk factors collaboratively, member entities reduce the overall cost of coverage for one another.

When managed effectively, municipal risk pools have the potential to offer several key benefits to participating entities. These are a few of the most commonly seen benefits:

Cost savings

Typical profit margins in commercial insurance range from 10-15%. Risk pools are, by definition, non-profit public organizations. Their coverage is not offered as a commodity but rather as a public service, leading to significant savings for member entities.  The National League of Cities (NLC) estimates that members of municipal risk pools save 10-20% annually over the long run compared to purchasing commercial insurance.

Member expertise

Municipal risk pools are mission-driven organizations with executive boards comprised of representatives from their member entities. In the case of risk pools that manage law enforcement risk, this means both serving and retired officers and specialized experts. They often bring with them a level of experience and expertise that is not only useful in crafting policy but frequently affords them an innate rapport with the law enforcement leaders that are charged with enacting risk management strategies. The familiarity with the language and culture of law enforcement helps promote trust and increase buy-in from member entities.

Long-term thinking

A public entity risk pool aims to stabilize long-term costs by reducing risk and increasing safety. Member entities all have shared accountability or “skin in the game” as their risk management policies, given the shared nature of risk and cost among the pool members, are likely to impact the overall health of the pool. With no quarterly profit incentive, risk pool members are empowered to create long-term policies initiatives centered on making meaningful change and lower costs for member entities.

Self-Regulation

Risk pool regulations vary state by state, but, in general, pools have a substantial degree of autonomy in their operations and decision-making. Because member entities share the same goals and understand the risks they are managing, efficient and effective management is mutually beneficial to members. Risk pools also usually seek accreditation which requires strict auditing related to governance, operational and financial practices, and a rigorous review of claims and underwriting.

The Role of Risk Pools in Police Reform

There’s a growing school of thought that insurers like risk pools can play an important role in enacting police reform efforts. Risk pools, by their nature, incentivize policies that reduce settlement, legal, and workers’ compensation costs. Policies that mitigate officer actions that can end in settlements are often complementary to those that minimize officer injury. When risk management is framed as common-sense cost savings rather than moralistic lines, there is evidence that buy-in from law enforcement agencies may increase.

“The idea is that the police may be less defensive when the constraints on them are framed as part of a sensible risk-management strategy to reduce liability and free up funds to pay for operational concerns, and equipment, and salaries.” John Rappaport, How Private Insurers Regulate Public Police.

Risk pools have the potential to contribute to the reform dialog in an especially impactful way compared to commercial insurance providers. With specialized knowledge derived from both member experience and expertise serves as a proving ground for new ideas that contribute to the general public’s safety and law enforcement officers. By improving public and workplace safety, law enforcement agencies can reduce their exposure to liability risks while, at the same time, increasing their effectiveness in fulfilling their mission to protect and serve their communities.