A closer look at how municipalities are navigating a complex liability landscape and adopting a more strategic approach to risk transfer
Nuclear verdicts against public entities have risen sharply in recent years, with some jurisdictions seeing settlements and judgments climb well into the tens of millions of dollars. That trend is unfolding against a public sector backdrop that, by most measures, remains financially stable, but far from uniform.
State and local governments are operating in what can best be described as a stable but uneven risk environment. While many states continue to benefit from surplus conditions and revenue flexibility, smaller municipalities, school districts and special districts often face mounting pressure with limited resources to respond. Add in more frequent weather events, rising jury verdicts, evolving cyber threats and the emergence of artificial intelligence (AI), and the public sector risk landscape becomes increasingly complex.
That divide between well-funded entities and more restricted ones is showing up in the way municipalities buy insurance, structure retentions and think about long-term risk transfer. Here are three of the most important dynamics shaping public entity risk today.
Property markets are softening, but long-term pressures remain
After roughly five years of steady rate increases, the property insurance market for municipalities is finally softening, though the degree of relief varies significantly by geography.
“Rates are coming down across the country, but a lot of that depends on where you are. CAT-prone areas like Florida and the Southeast are seeing the biggest rate decreases. In the Midwest, we might be looking at something more like flat or down 5% to 10%,” said Kevin Beer, president of Wright Specialty Insurance and Wright Risk Management.
As capacity improves, the placement process has become more competitive and property valuations, a major friction point in recent years, are now in a healthier place. Deductibles and retentions, which climbed during the hard market, are also beginning to face some pressure, particularly in higher-risk regions, though that trend is still developing.
“Structural pressures are becoming more visible, particularly rising labor and pension costs, deferred capital needs and the gradual expiration of federal support.”
At the same time, many municipalities are managing aging infrastructure, including roads, bridges, water systems and public buildings, often with limited budget for modernization and maintenance. That deferred capital need adds a layer of long-term exposure that may not show up cleanly in a property premium but can significantly affect how public entities absorb losses when events occur.
The broader picture, however, has not changed. Municipalities continue to face more frequent and severe weather events, even in areas not historically considered high risk. And for public entities, the impact extends beyond physical assets. Service disruption and continuity costs are just as real. So, while municipalities are seeing short-term relief on premiums, long-term pressure from CAT losses and reinsurance remains very much in play.
Liability pressures are intensifying
Social inflation continues to be a significant driver of public entity losses. Larger jury awards, shifting public sentiment and expanded theories of liability are increasing claim severity, particularly in law enforcement and public safety-related exposures. If the property market is loosening, the liability side tells a very different story. Several exposures continue to create challenges for public entities, and in some cases, carriers are pulling back entirely.
Law enforcement is one of the most significant. The exposure touches jails, use of force, pursuit policies, arrest procedures and civil rights claims. It has become serious enough that some carriers have begun excluding law enforcement liability from broader public entity programs altogether.
“Law enforcement is probably at the top right now. Coming out of COVID, the political environment and just some of the claims and litigation we’re seeing against police has increased significantly,” added Beer. “Frequencies are up, we’re getting more claims, severities are up and the settlements and verdicts on those claims are significant.”
Sex abuse and molestation (SAM) claims are another area of acute concern, affecting schools, recreation programs and any public entity serving children. Many states have enacted revival laws that waive or extend statutes of limitations, meaning claims from incidents decades ago can still be filed.
New York’s Child Victims Act, for example, opened a window where people in their 70s were able to file claims related to abuse they experienced in elementary school. That creates real reserve and coverage challenges for insurers. Jurisdictions such as New York, California and Washington have legal environments that can make these claims extraordinarily expensive, and coverage carve-outs are becoming more common depending on loss history. The exposure also extends beyond schools to any public entity running after-school programs, daycare or youth recreation.
For many municipalities, the issue is not just higher cost. It is greater uncertainty around what is actually covered, where gaps may exist and how much risk they may need to retain.
Cyber conditions have eased, but the exposure keeps growing
Cyber, by contrast, is a market where insurance conditions have calmed even as the underlying risk continues to intensify. More capacity has entered the market, competition has increased and pricing has stabilized, but the exposure itself keeps getting more serious.
Attacks are becoming more sophisticated. AI is making phishing and impersonation more convincing, and municipalities are increasingly dependent on third-party vendors, creating another layer of risk. School districts and municipalities are high-value targets not just for ransomware, but because disruption to their services carries real community impact.
“When a municipality purchases cyber liability coverage, the quality of the carrier or pool’s response to cyber incidents is really critical,” said Kevin Meehan, vice president of Arrowhead Public Entity and senior vice president of Public Risk Underwriters of Florida. “It takes experts to navigate it correctly. That’s really what you’re buying when you buy that insurance.”
Buyer awareness has increased in response. In Illinois, school districts are increasingly asking for higher cyber limits. And when an event does occur, the quality of the carrier or pool’s response team has become as important as the coverage itself.
AI adds another evolving dimension. The exposure is developing quickly, but the policies and underwriting are still catching up. Underwriters are beginning to scrutinize AI governance, data controls and vendor accountability, and more AI-specific endorsements are likely on the horizon.
At the same time, strong risk management practices are playing a larger role in underwriting outcomes, particularly in areas such as law enforcement training, cyber hygiene, emergency preparedness and safety programs.
Risk pools are taking on a more strategic role
Given the complexity of these exposures, how municipalities transfer risk matters as much as whether they transfer it. Public entity risk pools still play a central role, but that role is becoming more strategic over time.
About 80% of municipalities participate in one or more pools, according to the Association of Governmental Risk Pools. Pools are often viewed less as a short-term insurance solution and more as a long-term cost stabilizer. Members have skin in the game. The incentives are aligned. The focus is not just on transferring risk for a single year, but on reducing losses, improving safety and creating greater consistency over time.
“The financial condition of state and local governments is generally sound and stable, but really uneven,” added Meehan. “Many jurisdictions benefited from strong revenue growth, conservative budgeting and unprecedented financial aid coming out of the pandemic. That helped them bolster reserves and stabilize their balance sheets. But structural pressures are becoming more visible, particularly rising labor and pension costs, deferred capital needs and the gradual expiration of federal support.”
Pools also tend to bring bundled value that can be difficult to replicate in a fragmented commercial placement, including training, safety programs, hazard mitigation, claims insight and loss control services tailored to public sector exposures. Larger jurisdictions, meanwhile, are increasingly exploring self-insurance in areas where they have the balance sheet to absorb litigation risk.
Across pools, private insurance and self-insurance, the common thread is the expectation that the insurer or pool functions as a true risk management partner, not simply a capacity provider. That expectation is only growing as AI is used to identify loss drivers, strengthen claims triage and make loss control services more responsive.
For public entities, the challenge is no longer just finding coverage. It is building a long-term risk strategy that can hold up across changing market conditions, rising loss severity and increasingly complex exposures.
This material has been prepared for general informational purposes only, is intended to apply generally rather than to any specific company and presumes appropriate discretion will be exercised regarding any particular situation.
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