 | |
| Volume 17, Issue 2 | Summer 2005 |
Mutualizing Risk Peter C. Young, Ph.D.E. W. Blanch Sr. Chair in Risk Management University of St. Thomas During the past 30 years, the single most important development in the world of public and nonprofit sector risk management is "risk mutualization." Although the basic principles of risk mutualization extend back centuries (the mutual insurance company arises from this history), the most recent wave of development has characteristics that distinguish it from its historical roots. But, first things first, what is risk mutualization? In brief, risk mutualization refers to a formal effort to share risks and the costs of risks among like-minded individuals and organizations. The form in which this occurs can vary. For a variety of legal reasons, public entities have tended to choose "risk pooling" as their vehicle. Non-profits have relied on things like risk retention groups or group captives. And there are other such vehicles that may occasionally be used like special purpose vehicles or certain banking arrangements. A survey of the current public and non-profit scene would reveal that risk mutualization is the dominant form of risk financing. For example, there are more than 500 pools in the United States and they provide risk financing for about 60,000-out of a U.S. total of 84,000-local governments. Pooling alone is reckoned to be a $10 billion business. And it is important to emphasize that all of this has happened since about 1975. Why has risk mutualization developed so rapidly? For the most part, mutualization is a response to the wild inconsistencies of commercial insurance markets. Although insurance has always been a cyclical business, since the 1970s the cycles have been wider ranging and more erratic. And, this has tended to mean that insurance (especially liability insurance, but also property and workers' compensation coverage) has periodically been either unavailable or unaffordable. Due to complexity of risks, public entities and non-profits have been particularly hard hit by the erratic cyclicality of the insurance industry. As one observer noted, "Public entities and non-profits are the first to be punished and the last to be rewarded when the insurance market turns." For entities and organizations that require budgetary stability to deliver their services consistently, the insurance market has become a troubling and unpredictable operating cost. Indeed, it is ironic to note that insurance, while supposedly lessening risk for organizations, in fact has become a significant source of risk for those very organizations. The track record for risk mutualization is substantial and impressive. Costs of financing risks have stabilized and have remained-for the most part-below commercial market long-term averages. And notably, these arrangements have also facilitated more effective risk management practices within their member organizations. And, in fact, most observers say that the real benefit of risk mutualization is not the availability of coverages but the fact that member organizations have access to top quality risk management services. Can transit authorities enjoy benefits from risk mutualization? Although this is a question best answered through a feasibility study, the general answer is an emphatic "yes." Thousands of public entities and non-profit organizations have found great benefit from participating in pools, risk retention groups, captives and other such vehicles. Risk mutualization does work. 
|
In this issue...
 |
