Fed Up With Rising Premiums, Colleges Go Into the Insurance Business.

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Author: June, Audrey Williams

Colleges looking to buy insurance these days are finding a harsh market.

The insurance industry, battered by recent natural disasters coupled with the attacks of September 11, 2001, is offering colleges tough terms, skyrocketing premiums, and higher deductibles. To make matters worse, colleges must navigate such terms at a time when some state appropriations are shrinking, budgets are tight, and endowments are just beginning to rebound. For some, finding a way to get all the major insurance policies that colleges typically buy â€" for property, liability, vehicle, and medical malpractice â€" at an affordable price seems hopeless.

But Indiana University has found a solution that appears to be working so far. Last year it formed its own licensed company, Old Crescent Insurance Company, to provide coverage for the institution's eight campuses. Old Crescent is a "captive" insurance company â€" meaning that Indiana pays premiums to its own company to cover specific kinds of claims.

"By doing this, we've distanced ourselves from the ups and downs of the insurance market," says Larry V. Stephens, director of risk management for Indiana University.

Forming a captive company is not new to higher education. But such companies have increased in popularity in recent years. John C. Borch, senior vice president of Champlain Captive Management Inc., estimates that 60 higher-education institutions are insured through captive com-panies. Some, like Indiana's, are set up by a single university, while others were formed by a group of institutions. United Educators, an insurance company owned by more than 1,100 higher-education institutions, offers the benefits of a captive company to its members as well.

Universities often turn to captive companies, a highly specialized form of self-insurance, when the market becomes unbearable.

"It's been a challenging market, and I think risk managers and trustees are looking for other alternatives," says Mr. Borch, whose company manages Indiana University's captive company.

In addition to providing colleges with more control over their insurance costs, captive companies allow institutions to make money from investing their premiums, just as commercial carriers do. Colleges also can better control their cash flow by paying premiums and claims on a schedule that works best for them.

Mr. Stephens has been a risk manager long enough to remember when an ultracompetitive insurance market meant discounted premiums for insurance buyers. In 1983, for instance, Indiana University bought $50-million of liability insurance for $350,000. Three years later, the availability of the same insurance had dried up, and the university could only buy $5-million worth at a cost of $1-million.

In 1987 the university began its first foray away from the commercial insurance market by turning to self-insurance. At one point it was covering up to $1-million in losses from its own funds. Commercial insurance was reserved for claims above that amount. Over a 10-year period, Mr. Stephens estimates, the university saved about $50-million.

Still, Indiana University trustees saw a captive company as a better option. Old Crescent now offers the university, which has its own claims department, coverage for medical malpractice, property, general liability, vehicle, and directors and officers. Meanwhile the university still pays commercial carriers to cover losses above certain amounts â€" $1-million is the lowest trigger point, depending on the line of insurance.

Already the university has saved at least $200,000 on the premiums for its property insurance and cut the cost of its malpractice insurance â€" which until recently it had purchased from a commercial insurance company â€" in half, Mr. Stephens says. The university was paying $300,000 annually in premiums to an insurance company for medical-malpractice coverage for its medical, dentistry, and optome-try schools. It was paying another $300,000 to a state fund that provides coverage for judgments or settlements in such cases, if they exceed a certain amount. Now about $130,000 goes to the captive company, and the same amount goes to the state fund, Mr. Stephens says.

Gone are the days when it was cheaper to buy insurance than to spend money on the wide variety of safety measures that can lower a college's insurance risks.

"We've just been very aggressive in finding ways to decrease loss," Mr. Stephens says. "Risk management can't be an island. Everybody has to be involved in loss prevention."

That could mean requiring drivers to use seat belts while driving university vehicles, or installing â€" and testing â€" sprinklers in all buildings that undergo major renovations. Regular fire drills are a must, and blocking fire exits is not tolerated. And 15-passenger vans, commonly used at some colleges despite a growing history of being involved in accidents, are banned at Indiana.

Although some cost-saving steps seem simple, Mr. Stephens says, people on college campuses don't always deem them important.

"Higher education has not embraced risk management to the extent that industry has," says Mr. Stephens, who is also a member of the board of directors of the University Risk Management and Insurance Association. "Loss control is not something where you can draw a straight line to the savings. Sometimes it's hard to get people to buy into the concept."

But a strict loss-prevention strategy is a good way to help control insurance costs. A captive company isn't always an option for some colleges, especially smaller ones that can't find several other institutions with which to form a joint company.

Indiana is now exploring adding other lines of insurance coverage, including insurance that covers losses resulting from crime, an area that is now self-insured.

Will underwriters ever go back to cutting deals with customers just to keep them? Not in the foreseeable future. "Securing affordable insurance can be a tough and a very difficult game," Mr. Stephens says. "But if you can control your claims, you can control your costs."

In addition to giving colleges more control over costs, 'captive' insurance companies allow institutions to make money from investing premiums.

PHOTO (COLOR): Indiana U.'s Larry V. Stephens: "Risk management can't be an island. Everybody has to be involved in the loss prevention."

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By Audrey Williams June