Co-authored by Steve Jagodzinski, Tristan Rhodeside and Henry Haase.

Pinnacle University is an annual event hosted by Pinnacle Actuarial Resources, Inc., where analysts and actuarial science students from various universities collaborate to research and present on a relevant topic in the insurance industry. This year, our group explored how universities obtain insurance. 

Risks and Exposures

Higher education institutions exist to teach students. However, their interaction with students is one of their main exposures to loss. Beyond traditional property (e.g., fire, theft, water damage) and general liability (slip and fall, chipped tooth in dining hall) claims, there are a myriad of claims related to compliance complications stemming from Title IX, the Americans with Disabilities Act (ADA), Family Educational Rights and Privacy Acts (FERPA), etc. Additionally, lawsuits from student athletes who have been injured on the field are of growing concern since there has recently been more media coverage of the lasting effects of sports injuries. Colleges and universities can also face scrutiny on how their students interact with each other. It is as important as ever for universities to effectively and efficiently respond to issues of sexual assault and hazing. Even if the institution was not involved with the incident directly, they face a reputational risk if they do not respond to problems on campus. 

Faculty are also a large exposure for the institutions. Some lawsuits can come from faculty, such as discrimination lawsuits from professors who believe they are being treated unfairly due to their race, gender, or age, and others can be brought against faculty. In the case of the latter, many general liability policies include a duty to defend clause, meaning the university is obligated to provide a defense no matter the actions committed by faculty so long as they were acting in their capacity as a professor.

Universities own a wealth of property and data, both of which pose a risk of loss for their universities. Due to the close proximity of buildings on most campuses, a single peril can cause catastrophic losses. For example, several years ago flooding damaged every building at the University of Colorado Boulder campus. Additionally, some buildings house large collections of expensive electronics, rare books or art. A minor event in these buildings can quickly add up. In one recent claim, a university’s new library had an accidental discharge of its sprinkler system causing their rare books collection to be severely water damaged. Data breaches are especially of concern for more prestigious universities. Hackers target data at these universities due to the higher average income of their alumni. Universities with an emphasis on research are also frequently attacked by hackers.

Necessary Coverages

Universities small and large have the difficult obligation to prevent losses, control them and, if all else fails, finance a diverse set of risks. At the forefront of this task is coverage related to property, both abstract and literal. Between dozens of buildings and millions of dollars’ worth of equipment, colleges have a lot to lose from destructive events. All major institutions insure their academic and residential structures because of their huge potential losses. Especially on more compact campuses, fires and floods are a huge threat to compensate for. Not only are the buildings under threat of destruction, modern tools and electronics within are vital to many universities and are an investment that must be insured. In addition, all students and faculty bring personal property in cases where they reside or frequently work on campus and a big decision for a school is whether they wish to provide protection for private property as well. Outside of physical ownership, many schools choose to cover intellectual property as well. Coverages such as loss-of-value insurance for athletes and insurance in case of stolen work or data can be vital to big schools with big reputations.

Aside from insuring property, both real and intangible, institutions also purchase liability policies in order to protect themselves from potential lawsuits. In order to protect from lawsuits stemming from slips, trips, falls and the like, universities purchase general liability policies. For some universities, this policy will also cover lawsuits brought against their faculty and staff. Other universities purchase separate professional liability policies that will defend their employees while they are acting in their professional capacity for the institution. For institutions that operate teaching hospitals, medical professional liability policies are purchased for hospital employees. More and more universities are using self-insurance programs, including captive insurance companies, to finance this risk and retain some of the loss exposure. 

Emerging Industry Trends

Commercial insurance companies offer traditional packages and coverages to universities for many of these risks; however, these programs have been gravitating to both single parent and group captive insurance companies. A captive insurance company is an insurer owned by the entity or entities whose risks are being financed. More specifically, these institutions are entering into or creating their own university captives that cater to higher education, meaning the coverages are carefully selected to accommodate those unique risks they may face. There are some ancillary benefits to owning the company that issues your insurance policies. Insurance companies profit from investing premiums, so this income in addition to any other underwriting profit would be retained by the owner. A captive is a licensed insurer that has direct access to the reinsurance market. Depending on the type of captive, risks and losses will be distributed to other members in the group. A shortfall to captives can be the substantial capital requirement that must be raised in order to fund and maintain day-to-day operations.

Moreover, there are some risks unique to higher education that are not ideally insurable. Namely, the notion and impact of reputational risk is bulldozing its way onto college campuses. Academia has faced intense scrutiny as of late, ranging from increased litigation from sexual assault and Title IX cases to the challenged integrity of college admissions programs through the scandal known as “Operation Varsity Blues.”

So, just how are universities going about repairing a tarnished reputation? As it turns out, university risk management programs are integrating enterprise risk management (ERM) to their practices. In short, ERM takes a holistic and proactive approach when deciding how to manage risks and exposures. It takes into consideration one’s business and long-term goals which may go beyond the scope of insurance. By implementing ERM, the program strives to prevent any smeared outlook on their institution. 

Concluding Thoughts

It is evident that the risks present on campuses vary in size and scope. Thankfully, today there are traditional and alternative insurable approaches alike that institutions can implement in their risk management programs. The emergence of university captives and ERM continue to attract all parties involved. We’re interested to see how these universities will continue to adapt in this new era of social media, a platform demanding diversity and improvements upon the higher education domain. As the insurance needs of these institutions continue to evolve and they gain experience as risk bearers, we envision the use of captives and self-insurance in higher education to expand into additional coverages and into the new risk frontier. 

Steve Jagodzinski is an Actuarial Analyst with Pinnacle Actuarial Resources, Inc. in the Bloomington, Illinois office. He holds a Bachelor of Science degree in Actuarial Science from Illinois State University. Steve has experience in assignments involving Loss Reserving, Group Captives and Loss Cost Projections. He is actively pursuing membership in the Casualty Actuarial Society (CAS) through the examination process.

Tristan Rhodeside is an Actuarial Analyst II with Pinnacle Actuarial Resources, Inc. in the Atlanta, Georgia office. He holds a Bachelor of Business Administration degree in Actuarial Science from Temple University. Tristan has experience in assignments involving Loss Reserving, Group Captives and Rate Filings. He is actively pursuing membership in the Casualty Actuarial Society (CAS) through the examination process.

Henry Haase is an Illinois State University (ISU) junior pursuing an Actuarial Science major and Economics minor. He is the founder and president of ISU’s Math Tutoring Club and also holds a position on the executive board for the Actuarial Club. Henry is currently in an internship position in Overland Park, Kansas working in medical economics.