In The Public Eye: A Closer Look Into Public Power

Intro (00:00):
Welcome to the Alliant In The Public Eye Podcast, a show dedicated to exploring risk management topics and challenges faced by today's public sector leaders. Here is your host, Carleen Patterson.

Carleen Patterson (00:18):
Welcome back everyone to another episode of In The Public Eye. The Alliant team looks at public entity from a very broad perspective, not only municipalities and states, but a lot of special districts, and our last few podcasts, we've focused on some of those specialized segments within public entity. And today we are focusing on another one, and that's public power. So, we work often with some of our other industry groups within Alliant Specialty. And today I've had the privilege to work with and have invited Aidan Heisey, David Heath, and Cynthia Fee to our podcast today. So, thanks for being here.

Aidan Heisey (00:56):
Thank you so much, Carlene. Yep, my name's Aidan Heisey, and I've been working in insurance for twelve years, working with power customers for the last six years, and of those years have mostly focused on not-for-profit power, public power, and cooperative power. And I work with some pretty incredible people on the broking side as well. Let me introduce to you our casualty broking lead for Alliant's Specialty Energy and Power team, Cindy Fee.

Cindy Fee (01:24):
Thank you, Aidan, so much and Carlene for bringing me together, to speak in public power today. A little bit about my background. I have more than 20 years of insurance and industry experience and bring a legal background. I'm a licensed attorney in California, as well as have vast public power experience, as a former legal intern and senior risk analyst at the Sacramento Municipal Utility District. And for the past six, a little over six years, have been fully dedicated in the casualty brokering space. I am a former member of the EIM's IAC and the AEGIS RMAC, and I'm also a frequent speaker at industry events such as the APPA conference, the AEGIS conference, and several other venues as well. In addition, just a quick shout out that I'm a founding member of the Women in Power and Utilities Networking Group, which helps expand connections for women in the power and utility space and has touched more than 200 members at this point. So, with that, I'll turn that back over to Aidan to introduce the remainder of our team.

Aidan Heisey (02:23):
Thank you, Cindy. Now I want to introduce David Heath. David comes to us with 35 plus years of experience in energy and power, and he has spent most of his time working on property insurance, but that is not the limit of his knowledge. David, thank you for joining us.

David Heath (02:42):
Thanks very much, Aidan. Great to be here. Thanks for the invitation. Nice to see you, Carleen and Cindy. As Aidan said, I've been in the insurance space, brokerage space for over 35 years now. Had the privilege of representing privately held firms, public power companies, cooperatives, IPPs, and the publicly traded sort of household name firms. I like to think that my experience allows me to sort of think without borders and bring creative solutions and structures just by the individual client need, and that's what we call work, but actually it's good fun.

Aidan Heisey (03:14):
Great. Thanks a lot, David. Without any further ado, let's jump into our topic for the day. We want to talk about public power, of course. And we'd also want to talk a little bit about how public power might differentiate from other power generations, particularly from an insurance standpoint. So, I'd like to ask both of you, how does public power differ from for-profit power when it comes to insurance?

David Heath (03:42):
Well, thanks Aidan. Yeah, it's an interesting question. The first thing that is worth noting and I don't think it can be stressed enough, is this innate high level of accountability. You know, down to the personal level, right? This sector is so, sort of, by the community, of the community, for the community, and that's the attitude that it brings to that business. And I think the ramifications of that run really deep. So that's my perspective from how this sector is different from the for-profit sector, Aidan, and back to you.

Aidan Heisey (04:14):
That's great. Thanks a lot for that, David. Cindy, maybe from a casualty perspective, you can give us an idea of how you see public power differing from for-profit power and also how carriers might see it differently.

Cindy Fee (04:29):
Absolutely, and I think some of what was mentioned by David definitely crosses over into the casualty space as well. But one of the main ways that we see public power differ from other power generation is really around public power's strong positive loss history. So, we like stable, we like boring in the power and utility space. We, you know, with that - steady as she goes is a great place to be and that's a great message to be able to provide to the insurance markets as well. And really with a few exceptions, we really don't see a lot of frequency or severity of losses coming up for public power folks. And really several factors can come into this as well. And folks living and working in the community, we just really don't see that same incentive or drive to want to jump to file a lawsuit against your "neighbor" who might be, you know, living next door that you're barbecuing with and then all of a sudden, you know, you're filing a lawsuit against their employer.

The perception doesn't seem to be there to want to do that or the drive to do that as you see compared with other investor-owned utilities that might have some, you know, challenges around the litigation space as well. And really dovetailing in with this also is that public power tends to be really well regarded in their communities. They're perceived as doing the right thing, they're trustworthy, they're trying to educate the rate payers. There's a lot more public perception that's positive than again, as compared with maybe one of the investor-owned utilities where the public's perception is that it's more being driven for a profit or gains for their shareholders versus really helping the community out, which is what we do see on the public power side. And then also a factor that comes into play around the loss frequency and severity as well is that some public power utilities, depending upon the state of course, can benefit from tort caps or sovereign immunity that can operate to either limit or fully absolve the public power utility from any financial liability for losses. Of course, this is state by state, of course, there's lots of exceptions that come into play, but overall public power does benefit in a lot of jurisdictions from tort caps or full immunity from liability types of claims. And then moving on from looking at their strong positive loss history. Another thing, and David feel free to chime in on this as well, another thing that we see different on the power side is we see an interesting mix of risk exposures come into play as well.

David Heath (06:57):
Yes, that's interesting, Cindy. You know, you're quite right and you know, there's always a counterweight, right? We were highlighting some of the things that are good differentiations, but you know, if it was easy, someone else could do it, right? You know, things like fiber optics and bus systems certainly bring different features to a program.

Carleen Patterson (07:17):
Yeah, that's an interesting point that you bring up, David, because traditionally in public entity there are some very broad forms that cover those very typical municipal operations like Aidan mentioned, the police, you know, libraries, you know, public safety. They're all included in those types of coverage and the typical types of buildings that might fall into those coverages. And the challenge is when you start getting these specific operations like that, those general public entity forms aren't built to provide a lot of the detailed coverages or sub-limits that you might find on a specialized power gen form for property or even from a casualty perspective as well.

Cindy Fee (08:06):
Absolutely, and Carleen, just to tag onto what you're saying there as well, and a little bit what David was saying also, is there are some definite economies of scale that can be built into combining things together, right? So, certain things like auto or workers' comp, things that don't necessarily have a lot of risk differential between, or perceived risk differential, between say, a city versus the utility. And you know, there can be some efficiencies in combining those into a program. However, when we're looking on the liability side and you're really trying to tease out what some of the specific risk factors are from a liability perspective, they are very different from what you would see under a typical city or municipality type of policy. And so, what we tend to see on the liability side, particularly on the excess liability side, is we tend to see programs on a standalone basis for liability.

And that's really because one, the insurers, there's a specific set of insurers that want to and like to provide liability insurance for utilities, public power or investor-owned utilities. So, you've got that one factor, you've got the insurance market appetite, and then you also have what I consider the most important factor would be the coverages. And so, utilities have very specific risk profiles and risk coverage issues that can come up that we do have very broad insurance coverage language, most typically by AEGIS the mutual insurer. I can give back coverage for things like failure supply, wildfire pollution, even smaller things like unmanned or manned non-owned aircraft. There's broader forms of coverage that are out there, very much tailored to utilities to bring in coverage for those risk exposures that you wouldn't necessarily otherwise find a good fit for in the standard commercial marketplace for municipalities or cities.

Aidan Heisey (10:01):
There's certainly a number of different ways to do it. If you have everything combined, you're probably limiting your insurer pool. Insurers don't like to do a lot of what they don't fully understand. They try to avoid it. There's coverage considerations to make, there's price considerations to make. The bottom line is whether you have them together or you have them separate, it makes sense to look at doing it the other way and at least have a conversation around it. With that, I'd like to ask David and Cindy both about emerging risks, the big challenges that are out there right now for risk managers with public power. What have you been running into recently and you know, what can we do to kind of mitigate those challenges?

Cindy Fee (10:48):
Absolutely, and I think this one might be one of those things that's the issue as old as time here. And it's really one of the things that we see really often coming up now is this managing the competing factors of budget dollars for insurance and insurance capacity, particularly in the volatile insurance marketplace that we've had since 2019.

Cindy Fee (11:09):
So, since 2019 we've had very hard market conditions on the liability side, there's been a huge uptick in frequency and severity of claims. There's a lot of factors that go into that. We could talk for hours at another time about that. But really the idea around it is this, we've had very hard market conditions. We've been seeing double digit increases year-over-year since 2019. Those are now just starting to levelize out here in 2022. And as we're reaching the end of 2022, we're seeing those start to come back down. That being said, it doesn't stop the fact that we are still seeing these year-over-year double digit increases. They might be starting to creep down into the high single digits, but they're still there and it's still a meaningful impact on the budget, particularly for our public power folks that we work with as well. And these increases are impacting loss free accounts. So, it's always a difficult discussion with your board of directors or with senior management around, how do you justify the fact that our insurance premiums are going up by X percentage when we haven't had any losses? We're steady as she goes, we're stable risk, things aren't changing, but we're still seeing these huge impacts and really, it's driven by the market conditions.

Carleen Patterson (12:22):
Really appreciate that. The one question that I have as a public entity broker who only dabbles a little bit in public power and rely on you all as specialists, we've been talking about some of the emerging risks across public entity on some of our past podcasts. What from your perspective, are the emerging risks for risk managers in public power?

David Heath (12:48):
Yeah, thank you Carleen. You know, the market environment these last years has been tough. There's no doubting that, it's been pretty dismal for more than a couple of years and we saw some signs of optimism earlier in 2022. But we're certainly not out of the woods yet. You got to bear in mind that this sector is also underwritten by a group of underwriters who also write the broader energy sector. Natural catastrophe is a growing problem for folks. So, we're not immune to the influence of other elements in the energy space. I also think in the last few years it's been particularly difficult for some of the public power customers because they're not small enough that they are with a pretty mainstream insurer and they're not paying the multi multimillion dollars because they're not a household name. They're somewhere in the middle.

And insurers in a hard market environment are rather defensive and it's easy for them to say no. And that's leaning toward no is easier when they don't know the market sector particularly well. They don't know the individual client. There's a large impact, I believe, on the public power sector of some of the power insurers not knowing them as well as the larger for-profit power sectors. Inflation is something that's talked about ad nauseam, right? And we feel it in our everyday lives. Inflation does two things. It means insurers can start assuming that your asset base is now worth more, which may or may not be true. But another thing that inflation does is it eats away deductibles, but deductibles just become worth less than they previously were. So, we can expect to see at some point some pressure from insurers to start increasing those. I think in terms of emerging risks, cyber is something that's just been off the charts, right? There are alternative markets. So, the message from property insurers really is they don't want to touch cyber, but they want it done by a new specialty market, which is evolving, and there are alternatives for that. There are couple of things that I see as emerging risks and challenges that we are facing.

Aidan Heisey (15:10):
David, you mentioned something in there and thank you for that. You mentioned a lot of important things and one of the things that really caught my notice, because it's something that I notice all the time in this industry, maybe some of these public utilities, they're not a household name. It kind of puts them in some sort of a middle market space. It's hard to figure out where to put them. And you know, as brokers, we'd put them with any place that would be a great place for them, but for the insurance companies, sometimes it's hard for them to choose where they belong. So, what can someone do to try to mitigate that a bit and get their name out there and get these prospective insurers interested?

David Heath (15:54):
It comes back to a word that we use; it's about differentiation, right? We do that at Alliant. We believe that we are differentiated from other brokers because we can deliver a higher level of service and product to our customers than anybody else, right? And we have to believe that, and we believe our customers do the same for their customers, right? So how does that apply to the insurance buy? Getting your name out there is something that perhaps doesn't happen because you've got a really successful program that's worked for years and years and years for the same partner and same strategic partner and everything's running totally fine, right? And there's nothing wrong with that, but two things happen. It's very difficult to break that relationship, perhaps for good reason. On the other side of the coin, it's just as tough for an alternative insurer to compete because the incumbent has such a depth of knowledge that can't be matched by somebody coming in new.

So, it's not a, you know, flick the switch and everything will change. But to invite competition into the program, you've got to try and level that playing field. Generally, that's information. Be willing to meet with insurers that you don't know. Build an underwriting presentation, put your best in front, differentiation, there's that word again. Talk about engineering and loss prevention, what your attitudes are, what your maintenance plans are, how you deal with near misses, all these sorts of things. And you know, it's all going to be a positive message because this group is about the community, for the community, by the community, right? So, you know, there's going to be positive stories and to me that's about leveling that playing field. And that will bring the advent of competition into a program if for no other reason, you might find out that the current insurers are the ideal partners, but now, you know why.

Aidan Heisey (17:49):
Thanks a lot for that David. That's a really good point. Maybe there's some hurdles there, but there are a lot of creative ways that you can get yourself in front of these insurers, the ones that you don't work with and get yourself known.

Carleen Patterson (18:02):
Thanks very much Aidan. So, any other thoughts before we close the podcast today?

Cindy Fee (18:09):
I think I'll take with just a real quick recommendation as well is that the public power space is such a close-knit group of risk managers. So, to utilize your peers in this space, reach out to them, talk to them, you'll find so much transparency and openness around risk exposures, mitigating factors that are coming up or different types of issues or struggles they're dealing with. Even talking about premium increases and levels of rate increases. You'll find that very close-knit group of folks a great asset for any risk manager in the public power space. And then, also, just get engaged, and whether that's joining the Women in Power and Utilities group, let me know if you're interested, or engagement in other public power industry events, the APPA or the AEGIS Claims Seminar or the AEGIS Policyholder Conference. Just really get engaged because those mutual insurers have a wealth of knowledge on the loss engineering side, on the claim side, on any sort of risk exposure side, just tips and recommendations that they can provide that are hugely beneficial for any of our public power risk managers.

Carleen Patterson (19:19):
Yeah, I've always said, one of the advantages of working with public entities is there are not a lot of competitor lines drawn between risk managers. So, there's a lot of information that gets shared, whether it's through some of the industry groups you mentioned, Cindy, or through the Public Risk Management Association, whatever it is. But I do want to thank Cindy and Aidan and David for joining me today. We are going to have a couple of follow-up podcasts diving into this a little bit more, but as always, it is a very challenging time for risk managers in the public entity space. And here at Alliant, we are focused on trying to provide continued information and resources as we navigate the end of 2022 and beyond. So, thanks very much to all of you for joining me today.