Writing public entities: how they compare to profit businesses

Does your agency currently write or pursue public entity business or have you ever thought about pursuing this market?

If the answer is yes, you know that there are a number of similarities as well as an equal or greater number of differences between public entities and profit-seeking businesses.

In order to be successful, it is important to understand these similarities and differences between how public entities and profit-seeking businesses approach their missions, operations, and most importantly, make their decisions.

Traditional fundamentals of the risk management decision-making process apply to both types of operations: 1) Identify and analyze loss exposures. 2) Examine risk management alternatives. 3) Select the best risk management alternatives. 4) Implement the respective risk management techniques. 5) Monitor and approve the risk management decision.

All organizations, whether public or private, go through this decision-making process, either formally or informally. In this respect, public entities are no different than profit-seeking businesses. Fundamentally, the risk management process is a specialized version of traditional problem solving. The goal is to address the business problems that deal with potential loss exposures as well as the techniques, methods, and products designed to mitigate loss. Risk management involves the administrative process of planning, organizing, leading, and controlling any entity’s activities in order to reduce the incidents and costs associated with exposures to loss.

Public entities are similar to profit-seeking businesses in that unless they are of significant size or scale, they will not have a full time risk manager on staff. In both types of organizations a number of individuals may assume this responsibility, and in cases where they do not have a full time risk manager, they will greatly depend on their insurance agent or broker to counsel them on how to deal with exposure to loss issues.

Primary differences between public entities and profit-seeking businesses can be broken down into eight categories.

Governmental functions. Public entities strive to provide the essential governmental services. Distinctly different from profit-seeking businesses, they are charged with providing essential services to the community and do not have any options for discontinuing these public services. Their mission is dramatically different than a profit-seeking business that provides a particular type of product, product line or service.

Scope of exposures. The wide and ever expanding list of services public entities are required to provide to the community creates tremendous exposure to loss for the public entity. In addition to the traditional exposures to loss, each of the different operations of a public entity has unique exposures that require dramatically different considerations than those of a profit seeking firm.

Special legal requirements. Public entities, in some instances, have specific governmental immunities from loss with respect to products or services they may provide. Profit-seeking businesses are not afforded this legal status since they are not required to provide specific products or services. This is unique to public entities and generally varies from state by state.

Public interest, non-profit objectives.As noted, public entities by their nature are not for profit are exist to serve the needs of the community. This is a clear dramatic difference from profit-seeking firms that exist to provide profit to their owners. Profit-seeking operations will be either publicly or privately held and actually own the business as opposed to public entities.

Power to tax. Public entities are unique in that they have the ability to assess taxes and fees from the community for the services provided. Profit-seeking businesses do not have this power.

Political scrutiny. The general management of public entities is openly disclosed to citizens. Generally, input and participation from the community are encouraged. In contrast, profit-seeking businesses typically are not accountable to anyone other than the owners, and decisions are generally made by the business owners who are always striving to maximize profit.

Special tax status. Public entities are generally exempt from income and sales tax. Private organizations are required to pay real estate and income taxes as well as respective fees and surcharges deemed appropriate by the governmental entities.

Different accounting and budgetary procedures.Public entities follow different accounting procedures than do private organizations as a result of their revenue stream, investment decisions and budgeting process.

Analyzing exposure to loss
All aspects of the public entity should be analyzed for exposure to loss. Some of the more common techniques for identification are: surveys and questionnaires; review of loss history; review of financial statements; review of general records and documents; review of organizational flow charts and structure; personal inspections; and consultation with public entity decision makers.

Public entities present unique insurance and risk management challenges for agencies. But those agencies that gain insight into a public entity through proper due diligence and follow through, should be properly recognized and, hopefully, duly rewarded.

John Solari is president of Professional Underwriters, an Exton, Pa.-based underwriting and program management firm serving MGAs, agents and carriers. The firm is a public entity specialist. He can be reached at (888) 855-4782 or (610) 458-6900.