5 Critical COVID-19 Risks to the Public Sector

Uncertainty surrounding the effects of COVID-19 is plaguing every industry, but possibly none quite like the public sector. Here are the most critical risks that experts have their eyes on.

By: Emily Spennato | May 8, 2020

Taxpayers demand a lot from the public sector, especially in times of crisis.

The impact of COVID-19 has been no different, except this time, public pressure is even greater. To make matters worse, a pandemic does not offer the geographic limitations of a hurricane or the flooding of a coastal town. No U.S. municipality has been spared from coronavirus.

As our editor-in-chief, Dan Reynolds, wrote in 2018, “The public sector faces every risk the private sector does and then some.” Now more than ever, these words ring true.

Here are the 5 greatest risks to the public sector, brought on by COVID-19.

1) Budget Restrictions

Responding to a health crisis results in a huge increase in expenses and a large reduction in revenue from industries that are shutting down. A large risk exposure for the public sector is its reliance on other industries.

Jose Peralta, public sector director, Aon

“I think in the long-term there’s all this uncertainty about the sources of revenue that are needed by these public entities,” said Jose Peralta, public sector director, Aon.

“If you’re talking about a tourist-heavy municipality, when are those tourists going to come back to your city? What does that mean in terms of services that you have to cut? There’s also quite a big disparity because of the unevenness of recovery from the last recession.”

People tend to think of public services as resources that just show up when we need them and have unlimited funding, but in reality governments face tight budgets.

“Governmental entities are under budget restraints; most operating without the assistance of federal stimulus money. They struggle to obtain enough personal protective equipment and supplies,” said Dorothy Gjerdrum, managing director of Gallagher’s Public Entity practice.

Peralta added that times of crisis bring a better understanding to the public of just how difficult it can be for government services to meet demands and expectations with the funds they have access to.

“I think there’s a better understanding now of all the pressure that public entities are under,” he said. “They have higher demands for efficiency which makes them even more fragile, especially when they’re trying to react in the way that we expect them to react to events like this.”

2) Strained Resources: Human and Otherwise

On top of strained budgets, the public sector is also struggling to maintain an adequate supply of resources — such as personal protective equipment — to respond to the crisis.

Protecting employees and first responders from illness or harm is the number one priority for all sectors. This requires the proper PPE for those who don’t have the luxury of working from home.

In addition to that, staffing is also running thin.

Dorothy Gjerdrum, managing director, Gallagher’s Public Entity practice

“Many law enforcement officers are driving solo instead of in pairs; others are trying to minimize risk by wearing face masks. This is an ongoing challenge,” Gjerdrum said.

And no matter how scarce human or material resources become, state and municipality provided services cannot take the day off, which can take a physical and emotional toll on those tasked with delivering them.

“From garbage collection to the operation of prisons and detention facilities, state and local governments must continue to provide essential services, keep employees safe, and serve the public,” Gjerdrum said.

“I think there’s a big awakening around all of the ways that public entities factor into our lives and what they mean,” said Peralta.

“You have a K-12 school system, you think of it as a provider of education, but they’re also providing day-care, food and counseling.”

3) Cyber Exposures

Governments are at a 33% higher risk of cyber-attacks than organizations without public-facing applications. A recent report from Corvus shined a light on why ransomware attacks are gaining traction in the public sector.

They found that a lack of common security measures, such as the use of email security software, and often under-staffed and under-funded in-house IT teams could be part of the reason why governments are common targets for cyber attacks.

Times of crisis make these municipalities even more vulnerable. “Cyber-attacks on public sector operations are on the rise and with an increased number of employees working from home, that is a major concern,” Gjerdrum said.

Back in March, when social-distancing first went into place, the U.S. Department of Health and Human Services suffered a cyber attack that attempted to slow its coronavirus response. As a result, lives hung in jeopardy.

If employees don’t know how to take the proper precautions to protect their data from home, the data of entire organizations — and in this case entire cities and states — could be at risk.

According to the National Law Review, the best way for public entities to offset this risk is to conduct a Cybersecurity Threat Risk Assessment, have an incident response plan ready to go and test their own security.

4) Natural Catastrophes

As previously stated, unlike some disasters, the coronavirus doesn’t discriminate by geography. Municipalities fighting the virus have an even greater exposure should they be hit with a natural disaster.

“It’s being described like a natural disaster that’s happening everywhere all at once,” Peralta said of COVID-19.

And when natural disasters do happen, it’s the public entities — first responders, police officers, and EMTs — that are expected to be that crucial backstop.

“We’re about to enter into hurricane season and the spring flooding season in the midwest and we’re probably going to be hit by other natural disasters and other shocks to the system…We’re already reacting to this unprecedented disaster and it’s 100% guaranteed that somewhere in the United States public entities will need to react to a second disaster.”

With more resources being allocated in the fight for COVID-19 relief, there will be less supplies to allocate to natural catastrophe victims as well as smaller response teams.

5) Uncertainty

In any sector, uncertainty is just another word for ‘uninsurable risks’, with risk management as the strategy for planning for the future.

“In some ways, we have a better view of what we need to do to prevent the health crisis, but there’s this growing uncertainty and pressure on long-term ramifications and financial impact of this disaster,” said Peralta.

These ramifications could come in the form of furloughs and layoffs, reduction in services, increased taxes and higher insurance costs.

“Knowing when and how to re-open is a pressing concern,” Gjerdrum added.

“Businesses and people are anxious to put this behind us; that will make it tempting to open operations as soon as possible. Experts predict we will see new waves of infection if we open too soon. Limited access to testing and contact tracing limits our ability to know when it truly is safe to re-open, so that is a huge and present risk.”

Perhaps one of the biggest uncertainties and largest obstacles facing reopening is the social-distancing guidelines that will likely remain in place.

“There are discussions around maintaining social distance guidelines when classes resume. Many of the typical classrooms will be at half the capacity they were prior to this based on guidelines,” said Carleen Patterson, first vice president, practice leader, Public Entity, Alliant.

In spite of uncertainty and hardship, responding to a crisis will only make the sector more equipped to handle this type of disaster in the future. However, with likely little to no time to financially recover before a possible second wave, adequate preparedness is unlikely.

“Many of the uncertainties and risks that we face are uninsurable,” Gjerdrum said.

“We hope that lessons learned from this event will result in better preparation and practices that can be applied to a disaster of any type. Early, continual and consistent communication will be paramount. Insurance costs will certainly rise; that will result in lower limits and higher costs. That may generate more creative risk financing solutions and risk prevention tools and resources.”

“I think one really important takeaway is that this is a huge unprecedented disaster and people are completely unsure of how it’s going to affect the balance sheets of public entities,” added Peralta.

“But everyone is feeling the pain right now.” &

Emily Spennato is a former staff writer with Risk & Insurance.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.