AIC 12/8/17 THE OFFICE OF RISK MANAGEMENT ANNUAL REPORT Purdue University Office of Risk Management Annual Report 1

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3 AIC 12/8/17 THE OFFICE OF RISK MANAGEMENT ANNUAL REPORT Purdue University Office of Risk Management Annual Report 1

4 The Office of Risk Management Annual Report Property and Liability Risk Financing Program Insurance Year The Office of Risk Management coordinates and maintains the University s comprehensive risk financing program which includes the purchase of commercial insurance coverage for protection against catastrophic loss. It also manages a self-insurance program which covers commercial premiums, selected deductibles, self-insured exposures, and operating expenses. The program covers University assets and activities system-wide. Major exposures and coverage groups are outlined below: Property o Insured through American International Group (AIG) Provides replacement cost coverage for buildings and contents, fine arts, and business interruption Policy limit $1.5 billion per occurrence with no annual aggregate Per occurrence deductible is $250,000 A.M. Best financial strength rating of A General Liability and Educators Legal Liability o Insured through United Educators Provides a broad range of coverage including general liability, professional, employment practices, directors and officers and other exposures Catastrophic excess liability coverage limit of $40 million per occurrence and annual aggregate Catastrophic excess educator s legal liability/director s & officer s liability coverage limit of $25 million per occurrence and annual aggregate Per occurrence deductible is $2 million A.M. Best financial strength rating of A Cyber o Insured through Beazley Furlonge Ltd, a Lloyds of London managing agent Provides both first party expense coverage as well as third party liability coverage associated with the unauthorized disclosure of data as well as alteration, corruption, and or destruction of stored data Policy limit $5 million per claim and in the aggregate Each claim retention or deductible is $100,000 A.M. Best financial strength rating of A Fidelity (Employee Faithful Performance of Duties) and Commercial Crime o Insured through Fidelity and Deposit Company of Maryland (a Zurich company) Policy limits $11 million per occurrence with no annual aggregate Per occurrence deductible is $25,000 A.M. Best financial strength rating of A+ Purdue University Office of Risk Management Annual Report 2

5 Auto Liability and Physical Damage o Auto liability insured though United Educators Catastrophic excess liability coverage limit of $40 million per occurrence and annual aggregate Per occurrence deductible is $2 million A.M. Best financial strength rating of A o Auto physical damage is self-insured Aviation o Insured through QBE Insurance Group Limited Provides aircraft liability and physical damage coverage as well as general liability coverage associated with ownership and operations of an airport Liability limit of $50 million (airport and turbine craft) and $25 million (piston craft) per occurrence with no annual aggregate limit Each claim physical damage deductible $10,000 piston / $0 turbine craft A.M. Best financial strength rating of A In addition to these major coverage groups, the Office of Risk Management procures special insurance coverages on behalf of various University units in light of the activities in which they and their students are engaged. Examples of these coverages are international travel insurance and some aspects of the insurance for injuries incurred in intercollegiate athletics. Program Financial Health The Viability Ratio measures the funds available to cover outstanding obligations, including reserves established for outstanding claims, as well as estimates of claims incurred but not reported (IBNR). The gold bar represents the minimum desired Viability Ratio for the Risk Management Fund. Currently, our Fund has resources to cover its obligations at a ratio of more than 2 times obligations. The Fund s yearend balance of $10.8 million is in a more than satisfactory financial position to meet anticipated obligations. 3 Viability Ratio Purdue University Office of Risk Management Annual Report 3

6 Statement of Revenues, Expenses, and Changes in Net Position The financial activity of The Office of Risk Management over the last three years is illustrated in the following chart. Exhibit A to this report, which is also attached, shows the Statement of Revenues, Expenses, and Changes in Net Position for the risk management operation. The most recent year concluded at a net operating surplus of approximately $225,000 on total revenue of $9,003,889. (As a reminder, revenues for the operation are generated by amounts that are recharged to the various units for risk management and insurance services.) The available fund balance as of September 30 (insurance year-end) was $5.9 million and takes into account the overall amount of available reserves, current obligations associated with claims outstanding, and incurred but not reported loss calculations (via actuarial formula). Despite the positive net operating position, the current fund balance is approximately $400,000 lower than the prior year. This is due to an increase in both the value of claims outstanding and incurred but not reported losses. Risk Management Summary of Financial Activity Premium Expenses Loss Expenses Other Expenses Total Revenue $9,003,889 $597,427 $7,669,986 $3,635,468 $588,059 $5,624,600 $2,789,121 $601,886 $3,624,474 $3,978,593 $2,984,973 $4,552, Purdue University Office of Risk Management Annual Report 4

7 Coverage Category Premium History The chart below represents the University s three year insurance premium payment history for premiums paid to underwriters regarding major insurance coverage lines. The property insurance premium grew slightly (1.5%) despite no change in the actual premium rate. This was caused by an increase in insurable value to which the same low guaranteed rate was applied. The dramatic premium fluctuation for student coverages from was the result of a delayed billing by our underwriter in relation to a significant portion of that prior year s premiums. The end result was two years of premium payments hitting our books during the current reporting year. This skewed the premium bar in the chart above as well as the chart below. Liability premiums were up slightly (5%) and were reflective of the market and the expanding risk profile of the University. Although the aviation coverage rate remained the same, the total associated premium increased 7% as a result of the addition of 3 new aircraft in the aviation program. Risk Management Three Year Premiums Paid to Carriers Comparison Property Student Coverages Liability Aviation Other Coverages Premium Paid Loss History The chart that follows shows the University s three-year losses paid comparison, broken out by losses paid by the Risk Management Fund and losses paid by the insurance company/carrier. Large property losses paid in 2017 that exceeded the University s retention and required payment from the insurer included water damage to the Honors College ($488,000) and water damage to Brees/Mackey Arena ($713,000). Liability related claim payments were down significantly. Several smaller liability claims Purdue University Office of Risk Management Annual Report 5

8 Coverage Category were mediated and quickly settled. The Office of Legal Counsel and the Office of Risk Management partnered in bringing these cases to a cost effective and fair resolution, prior to incurring expensive trialrelated legal fees. Regarding aviation claims, the University had two teaching aircraft involved in weather-related incidents that resulted in hard or difficult landings, resulting in damage to the aircraft. Appropriate safety reviews and mitigation measures were examined after these incidents. Risk Management Three Year Losses Paid Comparison Property Property Property Liability Liability Liability RM Paid Carrier Paid Other Other Other Aviation Aviation Aviation Amount Paid Loss Control Loss control and prevention service continues to be an important point of emphasis with the Office of Risk Management. This effort is performed collaboratively with University departments and operations. Examples of risk management activities facilitated this past year include: Active participation in various campus safety committees and the maintenance of an extensive communication network with departmental areas around campus. Hosting 7 campus visits by the University s property insurer, which led to approximately 260 engineering hours being dedicated to the development of loss mitigation and property loss control recommendations. Additionally, 154 objects (boilers, pressure vessels, et.) were inspected to comply with jurisdictional boiler inspections. Approximately 60 buildings within the Purdue system were evaluated in accordance with the Purdue University Client Service Plan with the University s property insurance underwriter (AIG). New fire alarms have been provided or replaced at the following buildings: Purdue University Office of Risk Management Annual Report 6

9 o American Railway Building (2,800 sq. ft) fire alarm system o Materials and Electrical Engineering (118,310 sq. ft.) fire alarm replacement o Cary Quadrangle (48,474 sq. ft.) fire alarm replacement o Krannert Center for Executive Education (31,251 sq. ft.) fire alarm replacement o Michael Golden laboratories (78,000 sq. ft.) fire alarm replacement o Johnson Hall of Nursing (30,503 sq. ft.) fire alarm replacement Sprinkler protection has been provided for the following buildings: o Zucrow, Electrical Engineering, Bechtel Innovation Design Center, Football Performance Complex, and Wilmeth Active Learning Center. Human element programs (fire protection self-inspections, hot work permit program, fire protection impairment program, etc.) are well-established and documented. Excellent loss mitigation and prompt facility response continue to help minimize loss potential associated with water damage across campus. We continue to improve utility plant maintenance programs. Forward View of Plan Year General insurance market conditions remained stable, and we identified no compelling reason to market any of our major insurance portfolios this insurance year. General liability, directors and officers, and property premiums remained competitive. You may recall that, at our last opportunity to present to the Board of Trustees, we recommended holding off on conducting a formal rebidding of our overall program until insurance year Although our historical practice has been to rebid the program every five years (with the last one occurring in ), our recommendation flows from a cost-benefit assessment that embarking on this process this year would not deliver meaningful positive value. This position is based in part on other very effective market sounding mechanisms we use to gauge the competitiveness of our rates. For example, since the 2013 review, AON Risk Solutions (our broker and insurance consultant) has reviewed market indications, as well as peer reviews, to assist us in our annual insurance rate renewals. Through that process, we stay well apprised of where we are relative to similarly situated institutions in the marketplace. We believe this process of market rate comparison and peer review provides ongoing verification that the University is receiving the most competitive rates and is maintaining the most appropriate programs to meet our needs annually. Through the most recent insurance year, the University was on track to save $2.1 million in property insurance premiums over a three-year period expiring next September, based on a rate guarantee that had been provided by American International Group (AIG) two years ago. During our most recent renewal process, however, we identified an opportunity to re-negotiate with AIG to forego the final year of the current three-year term and replace it with a new three-year commitment from AIG at the same low rate. An added benefit is that the new three-year rate guarantee comes with AIG s new policy form, which provides some coverage enhancements in the area of first party cyber coverage. The net effect has been to extend the current low rate for an additional two years beyond the initial term, resulting in a bump in aggregate savings to $3.5 million over 5 years. In the opinion of Purdue s Director of Domestic and Global Risk, as well as the University s external insurance advisors, the move to lock in and extend the low rate was particularly prudent at this time, as the heavy natural disaster losses recently sustained by primary property insurers and re-insurers could very likely result in increased property rates over the next several years. 1 We engaged Albert Risk Management to perform the 2013 program review and to provide assistance in our bidding process at that time. That review confirmed our organizational efficiency and the cost effectiveness of our risk financing programs. Purdue University Office of Risk Management Annual Report 7

10 With regard to the University s liability insurance program, coverage limits for both general liability and educator s legal liability were enhanced. This was done in anticipation of the closing of the Kaplan acquisition and the commencement of Purdue NewU s operations in a few months. Enhanced limits will better position the University from a risk coverage standpoint by preventing the potential thinning of excess limits as NewU is added to the policy. The United Educators excess liability program provides an umbrella of excess coverage that rides over all Purdue affiliated entity primary coverage. The excess general liability policy limits were moved from $40 million to $50 million, and educator s legal liability coverage was moved from $25 million to $40 million. These new limits also better align us with limits carried by our peers. Aviation coverage with QBE Insurance Group Limited remained competitively priced. The University experienced a flat rate renewal or no rate increase from the prior year. Final premium does vary, however, as the aviation program aircraft assets (to which the flat rate applies) vary from year to year. As a result of its favorable loss history and risk management efforts, Purdue continues to enjoy some of the lowest aviation rates in the industry. The University s Cyber insurance coverage limit has also been enhanced to provide larger limits to cover the potential increase in cyber exposure associated with the pending Kaplan acquisition. Limits were increased from $5 million to $10 million. We will evaluate aggregate limits again next year as we continue to consult with our insurance brokers, consultants, and peers. Purdue University Office of Risk Management Annual Report 8

11 Exhibit A Risk Management Statement of Revenues, Expenses, and Changes in Net Position For the Years Ended September Revenue Revenue Paid to the Risk Management Program $ 7,769,246 $ 5,296,899 $ 5,630,438 Interest Earnings on Reserves 210, , ,526 Loss Recovery by Commercial Carriers 714, ,000 1,637,792 Third Party Recoveries 309,464 28, ,230 Total Revenue $ 9,003,889 $ 5,624,600 $ 7,669,986 Expenses Premium Related Expenses Premiums Paid to Carriers 4,425,627 2,761,123 3,869,893 Broker Fees 126, , ,700 Total Premium Related Expenses $ 4,552,377 $ 2,984,973 $ 3,978,593 Loss Related Expenses Losses Paid 2,704,132 2,242,989 2,814,853 Claim-Related Legal Fees 891, , ,625 Third-Party Administrator Expenses 28,550 23,930 23,990 Total Loss Related Expenses $ 3,624,474 $ 2,789,121 $ 3,635,468 Other Expenses Loss Control Program Expenses 67,734 65,516 63,617 Premium Rebate Expense RM Grant Program Expenses ,448 Office of Risk Management Expenses 534, , ,362 Total Other Expenses $ 601,931 $ 588,059 $ 597,427 Total Expenses $ 8,778,782 $ 6,362,153 $ 8,211,488 Change in Net Position $ 225,107 $ (737,553) $ (541,502) Net Position as of September 30 $ 10,785,285 $ 10,560,180 $ 11,297,733 Less Claims Outstanding (2,600,138) (2,333,202) (2,671,844) Less Claims Incurred But Not Reported (IBNR) (2,313,649) (1,959,875) (5,510,011) Unobligated Net Position $ 5,871,498 $ 6,267,103 $ 3,115,878 Purdue University Office of Risk Management Annual Report 9