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HomeMy WebLinkAboutNB 4 O.C. RISK MGMNT. 12-01-86~?,~ X:,~I . .~-I ~d .,~~~----~ NO. 4 DATE: NOVEMBER 26, 1986 L TO: FROM: SUBJECT: WILLIAM A. HUSTON, CITY MANAGER FINANCE DEPARTMENT CONSIDERATION OF CITY PARTICIPATION IN THE ORANGE COUNTY CITIES RISK MANAGEMENT AUTHORITY GENERAL AND AUTO LIABILITY POOL RECOMMENDATION The City Council adopt Resolution 86-140 authorizing the City of Tustin to participate in the OCCRMA General and Auto Liability Pool effective December 12, 1986. BACKGROUND The Orange County Cities Risk Management Authority has provided its member Cities with general and automobile liability insurance coverage on a non-risk sharing basis since 1978. During the past two years, along with all other governmental agencies, the eleven OCCRMA members have experienced dramatic increases in their premiums and a significant reduction of the coverage afforded by the policies. In many cases municipalities have been cancelled or not renewed at the conclusion of the current policy year. In anticipation of either a non-renewal from our present excess insurance carrier or a cost prohibitive renewal quote the OCCRMA Board of Directors requested that the risk manager and brokers develop potential alternatives for the December renewal~ After a review of the limited options the authority developed a risk sharing self-funded pool alternative utilizing the expertise of our full time risk manager, consulting brokers; underwriters; and legal staff. During July/ August, the member cities adopted the necessary By-Law/JPA Amendments to allow OCCRMA to form this new type of pool. On October 9, 1986, the OCCRMA Board of Directors received a preliminary renewal indication from Planet Insurance which refused renewal quotes for Tustin, Irvine and Laguna Beach, as well as indicating only "limited consideration" for renewal for Westminster and San Clemente. In addition, the Planet renewal would be for a One Million Dollar maximum limit including each City's self-insured retention, an exclusion of all road design claims, a claims made form and a two times limit aggregate (two million dollars) on general liability claims. With the possibility of half the members being refused a renewal quote, the extremely poor terms and conditions, of the insurance policy and the indication from Planet that the premiums would be equal to or greater than last year, the Board determined there was -insufficient interest by the members to seek a renewal quote for the group. RISK SHARING POOL The Risk Sharing Pool concept through OCCRMA is a fully self-funded pooling arrangement in which each city in the JPA would contribute to a self-insured accrual account an amount of money, determined by a professional underwriter .J William A. Huston Nov. 26, 1986 Page 2 hired by the JPA and menitored by an underwriting con~nittee composed of member cities, to meet the projected cost of risk each year. Member cities of the pool would be the same cities that are now part of OCCRMA: Cypress, Irvine, La Palma, Laguna Beach, Los Al amitos, Orange, San Clemente, Stanton, Tustin, Westminster and Yorba Linda. These cities have worked together closely for several years sharing data and risk management services and have a high level of confidence in the accuracy of the loss data and the predictability of the group's cost of risk. Additional members would be considered after January 1, 1987 based upon careful evaluation of each applicant's risk/loss history profile. However, the feasibility of the Risk Sharing Pool does not depend on growth in membership beyond a majority of the existing members. The Risk Sharing Pool will be its own insurance company, issuing an insurance memorandum (policy), "certificates of insurance" and providing professional services, such as underwriting, claims administration (to handle claims for the pool above the members SIR), brokerage and risk management. In the future, a captive insurance company could be rented and/or formed by the JPA, if necessary, to issue the insurance policy and provide administrative services to qualify for excess or re-insurance. Self-insured retentions (SIR) will be maintained by individual cities and range from a minimum of $100,000 to a maximum of $500,000, depending on risk factors, member's ability to insure risk and the professional underwriters evaluation of the necessary SIR/"premimum" balance required to equitably protect and fund the pool. Coverage will include municipal general and automobile liability and errors and omissions. Coverage would be in the form of a claims made policy which pays for losses incurred only on claims filed during the year the policy is in effect, regardless of when damages were actually incurred. The coverage limit would be $5,000,000 per incident and $10,000,000 aggregate for the group (higher limits would be added as the excess insurance market allows). Funding of expected claims would be thorugh two sources: (a) annual deposit "premiums" paid by the member cities. And (b) future assessments, not to exceed four times original deposit, should the cost of risk exceed the deposit premium. DISCUSSION Attached for your review is a booklet that contains all the documents pertinent to the plan. Starting from the back of the book is the plan document. The plan document sunmarizes the guidelines and mechanics of administering the program. This effectively spells out the rights and responsibilities of the member agencies. Preceding the plan document is the memorandum of insurance. This is basically an insurance policy written in typical insurance policy language. William A. Huston November 26, 1986 Page 3 Starting from the front of the report, the pooled liability program compares the OCCRMA policy form with the excess policy provided by the Planet Insurance Company last year. The coverages are identical with the exception of the limits, the pool will have an annual aggregate of $10,000,000 among participating members. If the excess insurance market should open up with favorable premium rates in the future this aggregate can and will be increased when practical. Directly following the plan comparisons is the proposed self-insured retentions and premiums. The SIR's and premiums were developed by a professional underwriter using industry standards and experienced subjectiv- ity. The underwriter utilized the memorandum of insurance and plan documents; applications submitted by each city~ claims history and if necessary site surveys to develop his recommended SIR's and premiums. For the City of Tustin he has recommended an SIR of $250,000, consistent with our current SIR, and he did not recommend an option for a higher SIR. The reason we are not given an option for higher SIR's is based on our past incurred claims history. In the underwriters opinion higher SIR's could cause a significant financial burden on the City if claims were to continue at a level they have in the past seven years. The recommended premium is $245,000, before expenses. This is a premium reduction of 25% from the previous year. Estimated expenses are $6,200 for a total premium and expense cost of $251,200, for a net reduction from last years premium of 23%. The section titled claims lists the outstanding claims as of 9-1-86 with reserve values in excess of $50,000. The reserve value is roughly 10% of the anticipated paid value. The next page simply lists the number of claims and their reserve values for the member agencies. The cash flow analysis is a five year proforma based on actual claims expenses for all members, factored for a 10% annual growth in value, compared with the proposed underwriters premium. Line A is incurred loses, claims have been filed but not paid. Total estimated payment, line D, is the amount paid out by the members and paid into the pool. Losses paid, line F, are actual amounts paid by the pool in excess of members SIR's. Net cash to escrow account is the balance of premiums, net of expenses and paid claims deposited with a trustee for future use of the pool. Investment income is added to the trustee account and trustee expenses are deducted netting to combined reserves for future claims. Future claim reserves are netted against accrued open claims, the result being estimated policy holder surplus. Open claims, future claims. Reserves and policy holder surplus can be reduced either to increase future claims reserves or be paid out to members in the form of dividends. This proforma goes out to 1995 to represent a normal claim cycle, the period between the time a claim is made and final settlement. The numbers shown in 1995 are somewhat skewed in that there is no premium income and the paid William A. Huston November 26, 1986 Page 4 losses and accrued open claims are declining. The proforma does indicate that with estimated reserves of $6.2 million in five years there is adequate resources available for serious "shock claims" and the potential for reduction of premiums or increases in coverages or both. The information in this pro-forma is the same information that an insurance company uses to determine its premium requirements and thus their profit and loss potential. While we are never allowed to see this privileged information we see the bottom line in the form of premium. As a participant we will always have complete financial disclosure and direct involvement with all phases of the operation of the pool. SU~[qARY Lack of insurance can have tremendous negative fiscal impact on a city if it experiences a few "bad" cases and has large judgments entered against it. One way of lessening this potential impact is to enter into the OCCRMA Risk Sharing Pool in order to spread the liability over a broader base. The downside, of course, is that the city assumes a share of the risk of other cities in the pool and may end up paying a portion of their liability losses. In essence this is the same situation that exists when you buy insurance whether it be for your personal use or business. Insurance companies have always rated premiums heavily by class and then increased premiums or cancelled policies based on risk perception. The point is we've always paid a portion of others losses in the form of higher premiums. As an example, automobile insurance premiums have historically been regionally and class rated. Auto premiums have steadily increased over the years regardless of personal driving records. The clear advantage of the pool concept is the availability of insurance protection and control of the books. Full financial disclosure will never be available from an insurance company. In the final analysis, the alternatives of wholly inadequate insurance coverage or "going bare" are short term solutions to the insurance "crisis", while the risk sharing pool has the best potential for both an immediate solution and long ten~. Ronald A. Nault Finance Director RAN:skr Attachments 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 RESOLUTION NO. 86-140 A RESOLUTION OF THE CITY COUNCIL OF THE CITY oF TUSTIN AUTHORIZING PARTICIPATION IN THE ORANGE COUNTY CITIES RISK MANAGEMENT AUTHORITY LIABILITY RISK SHARING POOL WHEREAS, the Orange County Cities Risk Management Authority (OCCRMA) has provided a liability insurance program since 1978~ and WHEREAS, the member cities now totaling eleven in number have developed over the years a cooperative working relationship to jointly solve many of the risk management issues facing California municipalities~ and, WHEREAS, the current crisis in the municipal liability insurance industry has left over 150 California cities without liability insurance; and, WHEREAS~ the Orange County Cities Risk Management Authority has developed a Liability Risk Sharing Pool division to replace the liability insurance program in the event the program is not renewed] and, WHEREAS, the OCCRMA Board of Directors has determined that the proposed 1986-87 insurance renewal would have such significant reductions in the policy coverage and inadequate limits that the liability risk sharing pool should be implemented~ and, WHEREAS, the City Council of the City of Tustin has reviewed the OCCRMA Liability Risk Sharing Pool concept and has determined that the pool concept offers the best long range solution to the liability insurance crisis. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Tustin authorizes the City to participate in the Orange County Cities Risk Management Authority Liability Risk Sharing Pool for general and automobile liability subject to the confirmation of the proposed deposit "premium" and pool membership. PASSED AND ADOPTED at a regular meeting of the City Council of the City of Tustin, California, held on the day of 1986. ATTEST: DONALD J. SALTARELLI, MAYOR MARY E. WYNN, CITY CLERK