How Bad Did That One Hurt

March, 2005

After reading the article on the Dickson County Schools property loss above, some of you may be wondering how their $2,000,000 loss would affect TSB-RMT’s or your school’s renewal rates for the upcoming renewal.

Here is the bad news. Every loss has some effect on the overall loss experience of TSB-RMT and our ability to get and keep your contributions as low as possible. Each loss adds to the ratio of contribution income to paid losses. If this gets too far out of balance, a contribution adjustment is necessary.

Here is the good news. The Dickson County Schools loss will have little or no effect on your renewal cost because the TSB-RMT spreads the cost of this loss and all losses over the entire 108 school systems and 58 other governmental entities in the program. This is much like the method used by a for-profit insurance company but without the profit. We expect some losses of the Dickson magnitude but the law of large numbers is hard at work at the TSB-RMT. Your faithful and continued participation in the TSB-RMT makes this sharing of risk possible.

Here’s how it works. Each renewal generates a “gross contribution” amount which is received by TSB-RMT and distributed in several directions. Roughly 60% of your contribution goes toward operational costs, reinsurance, fees and claims management expense. The remaining 40% goes into the “loss fund”. The loss fund is used to pay the “retention” or “deductible” that TSB-RMT must pay before excess or reinsurance kicks in to pay the balance of any claim. Any money remaining in the “loss fund” after all retained claims are paid, belongs to the membership.

A picture of John Wilburn giving Charlie Daniels a check for $100,000 represents the total financial responsibility of the “loss fund” in this instance, and the balance of the $2,000,000 claim is the responsibility of St. Paul/Travelers Insurance Company, according to TSB-RMTs current contract with them.

We all know from personal experience that if we accept a higher deductible, we pay a lower price for insurance. We also know from going to Sam’s Club that we get a better price if we buy in quantity. Your Trust uses the collective buying power of the volume of all members to buy a very large deductible insurance policy on our member’s behalf, saving significant dollars in the process. We then “pool” the remaining money in the “loss fund” to pay the “retention” or deductible on each claim. An added bonus is that TSB-RMT collects interest on these funds until the funds are needed to pay claims. The result is that any money in the “loss fund” that is not used continues to be the property of the members to offset future contributions. It doesn’t get any better than that.

Look at it this way. If you had taken all the premiums you paid to insurance companies for homeowners and automobile coverage over the years and put it in a savings account at interest, and paid all the claims you have had for the same period, would you have any money left? Most of you would have answered with a resounding YES. Those of you who answered “NO” should have purchased a very large deductible policy to cover that big loss you must have had. The problem is that we never know who will have that large loss. What if all of you had put all those premiums in the same bank account at interest and used part of it to buy a policy that covered every loss over $5,000? Would you have any money left? Absolutely!

The reason we know that you would have money left is because insurance companies make a profit after they pay your anticipated claims and include profit and overhead in the cost. Insurance companies don’t have any money. They merely hold your money and that of many other people until you have a claim. If you don’t have a claim, they keep your money and the interest it generates. This is what your Trust does for your school or governmental entity except we don’t keep your money. It continues to belong to the membership.

The entire process is not as simple as the above example but the concept is the same. It has worked Tennessee governmental entities for 18 years and continues to work today, saving tens of millions of dollars for Trust Members. Thanks from all your fellow Trust members for your participation and loyalty.