By Adam Andrzejewski
Topline
This year, the City of Baltimore’s cyber security insurance coverage amount was halved while its premiums and deductibles increased, all while giving its insurance broker for all the city’s policies a 35 percent raise to $575,000 annually plus commissions.
Big number
After it was the victim of two ransomware attacks, a massive one in 2019 that held city records hostage for month and a smaller one in 2018 that held the city’s 911 call system hostage for 24 hours, Baltimore City officials decided to buy ransomware insurance.
Beginning in 2019, the city paid $835,103 in premiums for $20 million in liability coverage from Chubb Insurance and AXA XL Insurance, with a $1 million deductible.
But the policy coverage has since been halved, to $10 million, while costing more than $1 million in premiums, as its deductible increased to $2.5 million, according to documents OpenTheBooks.com secured through an open records request with the City of Baltimore.
Key facts
The city’s “broker of record” collects an estimated $575,000 annually plus commissions at rates as high as 30 percent to service the city’s insurance policies, including its cyber insurance policy.
“Following a competitive process that included 35 insurance carriers, the Bureau of Risk Management was only able to secure a renewal quote for $10M in cyber liability insurance coverage through the incumbent insurance carriers,” a Nov. 2, 2021 memo from city Department of Finance Deputy Chief Shonkaye Stanley to the Board of Estimates said.
The memo about FY2022 cyber liability insurance coverage stated that the city was going to be paying more for less coverage from Nov. 1, 2021 to Nov. 1, 2022.
“As a result of well publicized attacks and [claims] incurred, insurance markets no longer have an appetite for providing cyber coverage. The city’s cyber insurance renewal reflects this current trend in the marketplace experienced by many businesses, particularly municipalities.”
Key background
After taking out its $20 million policies in 2019, premiums began increasing, to $949,172 for the period of Nov. 1, 2020 to Nov. 1, 2021.
This year, that premium jumped to $1,039,253 for half as much coverage.
The city’s documents showed that 32 insurance companies declined to provide the city coverage, citing as reasons “lack of appetite” or “lack of controls” or “due to business class.”
The city had hired Willis of Maryland, doing business as Willis Towers Watson, as an insurance broker and risk management consulting to manage the city’s various insurance policies, signing its most recent contract in August 2018.
In 2021, the contract was extended through 2024, increasing the company’s annual fee from $222,000 to $346,800.
It city also increased its estimate for how much it would pay the company in hourly charges for “ancillary services.” An estimated $200,000 in 2018 was increased to an estimated $226,250 in 2021, bringing the company’s total compensation to $573,000, up from $422,000 in the 2018 contract.
The ancillary services include “brokerage placement consulting” ($250/hour) “loss control” ($225/hour) “claims services” ($250/hour) among others.
Willis doesn’t make commissions off insurance policies known as an “agency bill” but does make them on policies known as a “direct bill.”
The 2021 commissions are 19 percent for each carrier of federal flood insurance; 10 percent for workers compensation insurance; and a whopping 30 percent for surety and public official bond coverage.
The commissions in the 2018 contract were 22 percent for federal flood insurance; 9 percent for workers compensation insurance; and 30 percent for surety and public official bond coverage.
No-Bid Contract
In 2018, Willis Towers Watson got a no-bid contract after having a previous contract with the city.
The city Department of Finance, Bureau of Risk Management explained in a July 27, 2018 memo to the Board of Estimates that in 2002, there were two responses to the city’s request for proposals or RFP, for a “broker of record.”
Willis of Maryland and Marsh USA, which was the city’s broker at that time, responded initially. But Marsh later wasn’t responsive, so the city gave the contract to Willis.
In 2008, another RFP was issued with two companies responding again, Willis and AON, which was later nonresponsive.
Willis got the contract again.
So in 2018, the memo said, “Risk Management expected the same outcome if services were placed out for bid again.
The Board of Estimates approved Willis of Maryland to be the insurance broker of record through 2021, later extending to 2024.
In 2018, the city had 22 insurance policies, according to the memo. It’s unclear how many the city currently has.
Crucial quote
“The insurance broker, in addition to providing rick management consultant services, also markets and places insurance policies with various property and casualty insurance carriers,” the 2018 contract stated. “It should be understood that the broker is the middleman between the city and the insurance companies.”
The contract argues the broker’s services are needed because it’s difficult for cities to get insurance coverage.
“Municipalities are not ideal business for insurance companies and insurance markets are limited. Insurance carriers have declined our business due [to] the complexity of the risk associated with a large metropolitan city, large values exposed and proximity to the nation’s capital from a terrorism standpoint. The [city’s] Bureau of Risk Management has enjoyed a 15-year relationship with its current broker of record. They understand the city’s exposure and are aware of our challenges, which is essential when placing insurance [in] the marketplace.”
Links to all the docs:
- https://www.openthebooks.com/assets/1/6/5.11_Chubb_Quote_Primary_2019-07-30_City_of_Baltimore_redacted.pdf
- https://www.openthebooks.com/assets/1/6/5.11_Invoice_2814553.pdf
- https://www.openthebooks.com/assets/1/6/5.11_Cyber_Original_Policy_Payment_additional_documentation.pdf
- https://www.openthebooks.com/assets/1/6/5.11_Invoice_2825899.pdf
- https://www.openthebooks.com/assets/1/6/5.11_City_of_Baltimore_-_1st_Excess_Quote_7-31-2019.pdf
- https://www.openthebooks.com/assets/1/6/5.11_Invoice_3110727.pdf
- https://www.openthebooks.com/assets/1/6/5.11_Invoice_3110724.pdf
- https://www.openthebooks.com/assets/1/6/5.11_First_Amendment_to_Professional_Services_Agreement_-_Willis_Towers_Watson_Southeast_Inc._-_signed_by_HRK_7.29.21._hjr_(1.pdf
- https://www.openthebooks.com/assets/1/6/5.11_Invoice_2513140.pdf
- https://www.openthebooks.com/assets/1/6/5.11_Willis_2018_Contract_Documents.pdf
- https://www.openthebooks.com/assets/1/6/5.11_Approved-FY_22_Cyber_Liability_Insurance_Renewal.pdf