Arkansas should start its own special-purpose insurance company to stem rising property insurance premiums for the public schools and higher education institutions, a consultant hired by the state Bureau of Legislative Research said Wednesday in a report to a legislative panel.
Arkansas should start its own "special-purpose insurance captive that retains all the losses within the annual loss forecast, while allowing enough premium and investment income to cover all expected claims and reinsurance costs," Meadors, Adams & Lee Insurance Co. of Little Rock said in its 85-page report. The consultant said a captive insurance company is a company whose primary purpose is financing the risks of its owners or participants.
The state's use of three programs for buying insurance "within the expected losses" is not efficient or sustainable, the consultant said. Two of the programs are operated by the Arkansas Insurance Department, and one is operated by the Arkansas School Boards Association.
The Arkansas Public School Insurance trust handles 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-owned insurance captive that charges the same rate per $100 of insured value is a more equitable model for all schools, both large and small, Meadors, Adams & Lee Insurance Co. said in its report. "Concentrations of higher value schools" necessitate a higher limit of insurance at $2.5 billion, the consultant said.
The consultant recommended capitalization with a minimum investment of $200 million of state funds into the state-owned insurance company and structuring the company to retain the first $50 million of losses and protect the capitalization with "sideways insurance on this retention."
The consultant recommended placing reinsurance above the retention up to a minimum of $2.5 billion. That's necessary to protect against a tornado outbreak, where one or multiple large tornadoes take a direct path through the highest risk concentrations, resulting in catastrophic damage to multiple properties encompassing the largest high school and/or college campuses, and substantially increases limits over the current programs and procures more insurance for lower premiums, the consultant said.
The consultant recommended charging sufficient premium to the schools to cover the annual expected losses and the cost of reinsurance, create policyholder surplus to be invested and pay claims.
The current program premiums are $86 million compared to $75 million under this recommended structure, Meadors, Adams & Lee Insurance estimated.
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 inertia.
"Where do we go from here?"
Sen. Terry Rice, R-Waldron, co-chairman of the state Legislative Council's Executive Subcommittee, said there are both "common sense things" and "complicated things" in the report, and it's clear the status quo is not going to work. There will likely be a meeting to further discuss the report during the fiscal session that starts April 10, he said.
The council hired the consultant for $50,000 last fall after approving in July Republican Gov. Sarah Huckabee Sanders' requests for $11 million in one-time funds to help school districts pay for rising property insurance premiums.
The council approved the governor's requests for $11 million from the state's restricted reserve fund after she announced that the state would cover 30% of the cost of the increased premiums for the public schools' property insurance and laid the blame on insurance companies for the large increase in premiums, saying the companies are trying to take advantage of already financially strapped public schools.
Last year, State Insurance Commissioner Alan McClain said the rising school property insurance premiums are due to a "convergence of factors -- poor claims experience, difficult conditions in the insurance marketplace and a negative outlook from weather models."