Actuarial Update Shows Higher Claims; Subcommittee Weighs Captive Insurance Options and Timeline

An actuarial update presented to the ALC Executive Subcommittee found that insurance claims for the 2023–24 policy period were higher than previously estimated, driven largely by several large claims reported after the June 30, 2024 dataset, presenters said.

Kyle Hales, a principal and consulting actuary at PerNite, summarized the firm’s updated analysis and told the committee that five late-reported claims increased reported claim values by more than $27 million in a single quarter. “The 07/01/2023 to ’24 insurance costs were higher than expected, based on the updated information as of 09/30,” Hales said.

Catastrophe-modeling output from a vendor called Cadence shows materially higher model estimates for average annual losses for flood and earthquake than the state’s historical experience. Hales and other presenters said Cadence’s modeled average annual loss for earthquake and flood exceeds $35 million, while historical averages over the last 16–23 years were substantially lower (the report showed less than $1 million on average for those perils over the historical period). For severe storms, the catastrophe model estimated roughly $31 million average annual loss versus low-to-mid–$20 million historical averages, the presentation said. Presenters also noted an overall increase in insured values of about 10.3% since the prior report.

Presenters framed these differences as an opportunity for the captive: retaining some catastrophe layers in a state captive could reduce total marketplace costs if those layers are priced above actuarial expectation. A PerNite presenter said that using a captive to retain portions of flood and earthquake risk could lower the system’s total cost of insurance over time, but cautioned that the captive would take on variability and the captive design requires careful layering and placement with multiple carriers.

Legislators asked for concrete savings estimates. Presenters said precise savings will depend on the upcoming renewal pricing and the reinsurance tower; firm quotes and renewal data are needed to model optimal retentions. “We won’t know an exact answer probably for several months until we go through, we get the renewals, we see how they price at various retentions,” a presenter said. Committee members and presenters estimated the vendor-selection and implementation process to be measured in months: officials outlined a tentative schedule to narrow RFP respondents in February, hold presentations in March, and—if contracts proceed—begin implementation in April with a six-month horizon to place coverage and operationalize a captive.

Representative Brooks and others asked whether all school districts’ exposure would be evaluated separately. Presenters said underwriting can be done at the district level so premiums or exposures can reflect localized flood or earthquake risk; doing so would produce district-by-district premium adjustments if the committee chooses that approach.

Bureau counsel Jill Thayer told the subcommittee that statutory changes will be required to allow the state to own and operate a captive; current law reserves captives to private businesses. Thayer said a package of bills to create the legal framework had not yet been drafted and will be needed before implementation.

Members raised FEMA-related questions for flood coverage and noted that not all districts supplied historical loss data (Bentonville was named as an example of a district not yet included in the claims dataset). Presenters said most of the large recent losses were wind-related and concentrated in some districts (Rogers and NWAC were mentioned), and that flood losses historically have been low in the available dataset.

Ending: Committee members directed staff to continue work on RFPs, statutory drafting, and vendor evaluation; presenters said they will model savings and retentions once renewal and reinsurance quotes are available.