STAFF REPORT DATE: June 8, 2012 TO: FROM: SUBJECT: Honorable Mayor and City Council Bruce Riddle, Finance Director RISK MANAGEMENT AND INSURANCE ALTERNATIVES COST STUDY RECOMMENDATION The Finance Department recommends providing URMMA notice of intent to withdraw and further study viable risk management and insurance alternatives. SUMMARY OF ISSUES/FOCUS OF ACTION The City has been studying the cost effectiveness of the current risk management and insurance program. With several viable alternatives identified, the City needs to provide URMMA with notice of intent to withdraw in order to pursue one of the alternatives. BACKGROUND Please refer to attached report. DISCUSSION Please refer to attached report. ALTERNATIVES Please refer to attached report. FISCAL IMPACT Alternatives to the current program could save the city $13,000 to $40,000 per year with enhanced coverage. Attachments: Risk Management and Insurance Study CITY COUNCIL AGENDA Meeting Date: June 19, 2012
RISK MANAGEMENT AND INSURANCE COST STUDY AND ALTERNATIVES PREPARED BY: SPRINGVILLE CITY FINANCE DEPARTMENT
Purpose The purpose of this report is to review Springville City s contracted risk management products and services along with the associated costs and compare them with alternatives. Background The City of Springville currently obtains property and liability coverage through a pooled risk program from the Utah Risk Management Mutual Association (URMMA) under an Interlocal Agreement originating in 1985 and amended in 1995. The intent of the agreement is to provide more comprehensive and economical risk coverage, to reduce the amount and frequency of Members losses, and to decrease the cost incurred by Members in the handling and litigation of claims. Under the agreement Members pool their resources to protect against losses and claims, jointly purchase excess insurance, and obtain administrative and other services including claims adjusting, data processing, risk management consulting, loss prevention, and legal services. URMMA is governed by a Board of Directors, which is composed of a representative from each Member. Votes of the Association are weighted votes with each Member being entitled to one vote for each one thousand dollars ($1,000) of net premium paid based on a formula established by the Executive Committee and calculated annually. URMMA Products and Services Under the Agreement, URMMA provides the following products and services: Coverage 1. Third party liability coverage, on a claims-made basis. This coverage consists of (a) bodily injury, (b) property damage, (c) personal injury, (d) public official(s) errors and omissions, and (e) employees benefit liability coverage. Losses covered by URMMA are paid by a combination of URMMA funds and excess insurance and/or reinsurance. The pool provides an initial layer of coverage up to $1,000,000, with reinsurance extending the limit by an additional $5,000,000, to an ultimate limit of $6,000,000. As a Group II member of the Association, the reinsurance attachment point is $650,000. 2. Property insurance. This coverage is placed with a commercial insurer. URMMA does not retain any of the covered losses. 3. Special events liability coverage. This is a fully insured program and URMMA does not retain any of the losses. 4. Off-duty vehicle liability program. This is also a fully insured program.
Claims Administration Services URMMA currently administers the liability claims it covers. This service is provided by URMMA personnel. While claims handling is primarily the responsibility of URMMA, City staff is still actively involved in the process. Loss Control URMMA provides the following loss control services: 1. An annual inspection, which usually takes about one day. Members must achieve a minimum score of 85% on the annual Loss Control Inspection in order to maintain good standing in the association. 2. Responses to questions, which represents about 10-15 hours of service annually. 3. Training that covers harassment training, supervisor training and other topics upon request. Training accounts for approximately 10 hours of service annually. Additional topic-specific training is available through URMMA, usually for a nominal fee. Recaptured Loss Program Under URMMA s Recaptured Loss Program, liability claims handled up to the pool layer are handled by the pool, with the claims up to $650,000 paid back to the pool. For claims paid by the association: 1. The Member reimburses the Association one hundred percent (100%) of losses above the deductible (the City maintains a $7,500 deductible) to the $650,000 attachment point; 2. The reimbursement is made in an amount equal to twenty percent (20%) of all payments above the deductible made per year during the previous five (5) years on behalf of the Member; and 3. The reimbursement for the single largest loss paid on behalf of a Member shall not increase that Member s current annual premium by more than twenty-five percent (25%). In FY 2011-12, Springville made recaptured loss payments of $25,930. This amount represents 20% of amounts paid in each of the preceding five years. The recapture amount on the largest loss payment will not exceed 25% of the current annual premium. The City s annual premium is the total amount paid to URMMA less the amount included for recaptured loses. The total premium paid to URMMA for 2011-12 was $147,962. Of this $25,930 was for recaptured losses. Thus, the maximum amount that can be recaptured in 2011-12 for a single loss is $30,508 (($147,962 - $25,930) x.25). This cap applies only to the single largest loss payment. Recapture amounts on all smaller losses must be paid. The practical effect of the recapture program is difficult to gage. If the City has many small losses it will pay them all. Responsibility for payment of a loss only transfers to other URMMA members if a paid claim exceeds the cap described above.
The cap applies to the amount that may be recaptured in a single year. In the above example, $30,508 can be recaptured in each of five years. Thus, the City s responsibility for repayment of a single claim would be capped at about $152,540 ($30,508 x 5). However, if the City suffers another larger loss in the same year or an ensuing year, the cap calculation would shift to the new claim and the City would become responsible for the full payment of the remainder of the first claim. To properly compare the cost of URMMA to the cost of a stand-alone self-insurance program, we will need to compare with a self-insured retention (SIR) of approximately $150,000 per occurrence. URMMA Costs Premium History URMAA costs vary annually and are summarized in Table 1 below. Table 1 Annual URMMA Costs ($) Fiscal Year Earned Premium Membership Fees Reinsurance Premium Recaptured Losses Blanket Property Total 2012 96,315 4,000 21,717 25,930 148,998 296,960 2011 96,167 4,000 22,017 20,570 159,437 302,191 2010 94,060 4,000 32,179 33,176 145,925 309,340 2009 91,151 4,000 41,707 65,030 126,593 328,481 Table 1 Notes: 1. The Earned Premium paid to URMMA funds claims service, loss control service and a contribution to URMMA s overhead. 2. The reinsurance premium funds URMAA s excess insurance/reinsurance policy. 3. Membership fees are a cost to belong to URMMA. 4. The blanket property insurance policy is brokered by URMMA and underwritten by a commercial carrier with payment from the City going directly to the carrier. The recaptured loss charges have changed based on actual loss payments. The Earned Premium charges have changed as URMMAs costs change and as the share of total costs charged to the City changes. The City s charge for reinsurance also changes based on URMMA s cost of reinsurance and the share of the total premium charged to the City. It is worth noting that the City s charge for reinsurance has decreased significantly from FY 2008 to FY 2011. The blanket property coverage changes based on the city s property list and valuation and changes in premium from the carrier.
Claims History From 1985, when Springville joined URMMA, to the end of FY2011, there were 583 claims against Springville totaling $1,757,295. A simple averaging of those claims indicates: 22.4 claims per year $67,588 average total claim settlements per year $3,014 average amount per claim The single largest claim during the period was $193,000. The top three types of claims were: (1) vehicle accidents, (2) sewer backups, and (3) personnel. In more recent history (2001-2011) the total number of claims was 346 totaling $709,995. A simple averaging of those claims indicates: 34.6 claims per year $70,999 average total claim settlements per year $2,052 average amount per claim The single largest claim in the last ten years was $49,823 (however, there was a $70,000 claim settled in 2012). The top three types of claims were: (1) sewer backups, (2) streets, (3) vehicle accidents. In order to understand the impact of claims settlements on cash flow annually, both payments below the deductible amount as well as payments toward URMMA s recaptured loss program must be considered. The following table documents claims payments for the last several years: Table 2 Total Claims Payments ($) Fiscal Year Payments below Deductible Payments toward Recaptured Losses Total Claims Payments 2009 18,026 65,030 83,056 2010 51,364 33,176 84,540 2011 44,302 20,570 64,872 2012 (YTD) 42,643 25,930 68,573 2013 (est.) 40,000 42,250 82,250 In comparing alternatives, payments below the deductible were not considered since each alternative had the same deductible amount and the City would be responsible for those claim payments regardless of the program.
Cost Outlook The following table summarizes estimated URMMA charges for FY 2013. Table 3 Estimated URMMA Costs for FY 2013 ($) Fiscal Year Earned Premium Membership Fees Reinsurance Premium Recaptured Losses Blanket Property Total 2013 97,000 4,000 22,000 42,250 168,000 333,250 Withdrawal from URMMA Article 24 of the URMMA Interlocal Agreement, Article VIII of the URMMA Joint Protection Program, and Section 9 of the URMMA Bylaws outline the process of a member city withdrawing from the association. A member city may withdraw from URMMA after an initial one-year non-cancellable membership in the program and at the end of a fiscal year after providing the Association a twelve month written notice of intent to withdraw from the Association. As such, would need to provide URMMA notice of its intent to withdraw no later than June 30, 2012 in order to withdraw by June 30, 2013. If the City formally provides notice of intent to withdraw its membership, it is unable to rescind its withdrawal notice without the approval of the Board of Directors. Under the agreement, withdrawing members are responsible for paying, repaying and/or reimbursing the Association for all contributions owing the association including all reimbursements associated with the Recaptured Loss Program. The City will not receive a return of any equity it may have in the Association unless and until URMMA dissolves. This applies whether or not the City withdraws from URMMA. Thus, this is a neutral factor in the decision making process. Alternative Risk Management and Insurance Programs What are Other Cities Doing? In exploring alternatives for this report an informal survey of other cities was conducted to better understand how their risk management programs are structured. Most cities in Utah belong to one of two pooled risk programs: URMMA or Utah Local Governments Trust. URMMA currently consists of 23 cities ranging in size. Small cities like Kanab, Midway, and Mapleton comprise Group I; medium cities like Cedar City, Draper, and Springville are included in Group II; and Group III is comprised of Layton, Orem, Ogden and West Valley City. West Jordan was also in Group III until it withdrew its membership effective July 1, 2011.
Utah Local Governments Trust (ULGT) lists nearly five hundred cities, towns and special service districts as members. Several neighboring Utah County cities like Lehi, Pleasant Grove, and Payson belong to ULGT. A number of other cities prefer the autonomy of a stand-alone retention based insurance program. Larger cities like Provo, Sandy, and West Jordan along with smaller cities like Bountiful and Clearfield are examples of cities opting for a self-insured program. Utah Local Governments Trust (ULGT) ULGT was founded in 1974 and is licensed in Utah as a public agency insurance mutual. ULGT policies are designed specifically for government agencies, including cities, towns, counties, special service districts and school districts. Like URMMA, ULGT offers insurance and reinsurance coverage, risk management, claims adjustment, and corporate and safety training services. ULGT combines components of a pooled risk program with elements of the insurance market at large. Property insurance policies, which include earthquake and flood insurance are underwritten at the pool level and a flat deductible is offered to all members. Policies for worker s compensation and liability are individually underwritten based on the member s claims history. ULGT can tailor a program to match what the City currently receives from URMMA; however, most members elect to participate in the ULGT s first-dollar coverage program. Because coverage under the first-dollar program is much more like a traditional insurance program, ULGT takes an active role in claims handling, which is done through a division of Traveler s insurance. ULGT will accept input from the City regarding claim handling, but ultimately, the Trust s Executive Director makes final decisions regarding claims. As such, Springville will likely lose some autonomy in regards to the claim settling process. ULGT has provided a quote that was intended to match the similar deductibles and limits as the insurance the City currently has through URMMA with the significant difference that risk would be limited to the deductible amount the City would have no obligation to repay claims above the deductible amount as is currently the case through URMMA s recaptured loss program. The table below highlights ULGT s offering: Table 4 ULGT Premium Overview ($) Coverage Deductible Limits General Liability 7,500 5M Property 10,000 Replacement Value Earthquake 1,000 100M Shared Flood 1,000 100M Shared Autos 500 Replacement Value Total Package Premium 260,805
Coverage from URMMA (FY12 premium actual plus $30k 5-yr. average for recaptured losses) 301,030 Potential Savings (40,225) Table 4 Notes: 1. $250k Crime/Employee Dishonest policy included 2. Police animals covered - $10,000/animal 3. No Loss Payback claims and legal fees included under the ULGT quote. 4. Recaptured loss payments need to be considered. The analysis includes the 5-yr. recaptured loss payment made by the city of $30,000. The City would need to pay the balance still owing to URMMA s recaptured loss program (FY 2013 budgeted payment is $42,250) even after switching to URMMA. While not included in their quote, ULGT has offered both of the other two alternatives explained above a program matching URMMA (including the recaptured loss program) or its popular first-dollar coverage program. ULGT has verbally quoted the URMMA-like program at 20 percent less than the rates the City currently is paying URMMA. Presumably, the first-dollar coverage program would have a higher premium since all of the City s risk would be shifted to ULGT, but would be worth exploring considering the City would transfer all risk. Stand-Alone Program As another alternative, Springville could consider a stand-alone retention based insurance program. Under a stand-alone program it would be advisable to retain the services of an experienced broker to assist Springville in the process of risk assessment, accurate presentation to the underwriters providing coverage, and to assist in procurement of insurance products. Aside from insurance coverage, the City would need to secure resources to administer the functions of claims handling and risk management that are currently handled by URMMA. In preparing this report, Olympus Insurance Agency, a broker experienced in municipal risk management programs, was consulted to provide budgetary estimates of securing the necessary insurance coverage and risk management services if the City were to establish a stand-alone program. Olympus reviewed URMMA s Joint Protection Plan and the City s current coverage and provided the following estimates for a stand-alone program:
Table 5 Stand-Alone Program Cost Estimates vs. URMMA ($) Coverage Deductible Limits Excess Liability 300,000 6M Property (incl. EQ & FL) 10,000 200M Claims Handling* Risk Management* Total Package Premium $288,000 Comparable Coverage from URMMA (FY12 actual) $296,740 Potential Savings ($8,740) Table 5 Notes: 1. Excess liability quoted at $300,000 deductible level; to better compare to the City s current stop-loss limit, the deductible level should be $150,000 2. Property insurance quote was verbal at or below current URMMA levels. 3. Claims handling and risk management services would either need to be absorbed by the city or retained separately. For purposes of the analysis, $15k for claims handling and $5k for risk management services was assumed and included in the total package premium. 4. For purposes of comparison, the total package premium includes $30,000 as an average annual amount paid for recaptured losses to URMMA. Under a stand-alone program the City would not have the option to finance claim payment over five years and would be obligated to pay the full claim in the year it occurred. In comparing the stand-alone program with the URMMA pooled plan it would appear that Springville could reasonably expect slightly lower premiums for coverage comparable to URMMA s. It is worth mentioning that Olympus quoted an estimate based on a $300,000 deductible, which is lower than the $650,000 limit the City currently has through URMMA, but higher than the loss cap limit formula currently in effect of approximately $150,000. According to Olympus, it is possible that with a more aggressive risk review and loss analysis the City could purchase a more tailored product in the market and through a competitive bid process realize greater savings both in excess liability and property coverage.
Alternatives: Pros, Cons and Other Considerations Pooled risk programs and stand-alone programs each have benefits and drawbacks based on the City s desired amount of autonomy, capacity for managing the program and tolerance for risk. URMMA Pros 1. Pooled Risk. Difficult to quantify the value of this element. 2. Recaptured Loss Program. Financing mechanism that helps smooth the repayment of claims. 3. Ancillary Services. Risk management, loss prevention, training, and claims handling services are part of membership and would need to be replaced under a stand-alone program. 4. Claims Handling Autonomy. Because of the structure of the URMMA program and retained risk the City has good flexibility in managing the claims handling process. Cons 1. Concentrated Risk. One drawback to the pooled plans available in Utah is that there is concentrated risk as all of the members are located in Utah. In the event of a widespread disaster (e.g. an earthquake affecting the entire Wasatch Front), the policies held in the pooled programs may be insufficient to cover all of the member cities to a reasonable level. 2. Comprehensive Agreements. While there are a number of binding agreements in place with URMMA, the thoroughness of the agreements as compared to insurance industry standards may be lacking. 3. Expertise. While URMMA employs capable staff with industry experience, the decision-making boards are comprised of city representatives that may not have insurance expertise. 4. Ratings and Regulation. Neither of the pooled risk associations in Utah are rated or regulated as a reputable nationwide carrier would be. ULGT Pros 1. Pooled Risk. Difficult to quantify the value of this element, but arguably greater than the URMMA benefit given the larger size of its member pool. 2. Lower Retained Risk. Under the quoted program losses are limited to the deductible amount. Potential to further limit risk through first-dollar coverage option. 3. Ancillary Services. Risk management, loss prevention, training, and claims handling services are part of membership and would Cons 1. Concentrated Risk. One drawback to the pooled plans available in Utah is that there is concentrated risk as all of the members are located in Utah. In the event of a widespread disaster (e.g. an earthquake affecting the entire Wasatch Front), the policies held in the pooled programs may be insufficient to cover all of the member cities to a reasonable level. 2. Expertise. While the pooled plans employ capable staff with industry experience, the
need to be replaced under a stand-alone program. 4. Lower Premiums. Initial quotes appear to offer a cost savings over URMMA. 5. Premium Guarantee. Three year premium guarantee. decision-making boards are comprised of city representatives that may not have insurance expertise. 3. Ratings and Regulation. Neither of the pooled risk associations in Utah are rated or regulated as a reputable nationwide carrier would be. 4. Because ULGT operates more like a traditional insurance carrier, the City will likely relinquish some control in the claims handling process. 5. The City may relinquish some autonomy in terms of claims handling as ULGT operates like an insurance company and would tend to protect its bottom line. Stand-Alone Program Pros 1. Flexibility and Broader Coverage. The City will have more flexibility to tailor coverage to its needs rather than accepting the coverage offered by URMMA. Commercial insurers may offer features and coverage beyond URMMA levels for same price. 2. While modest, there appear to be some cost savings under a stand-alone program Cons 1. The City will need to replace certain services (e.g. claims administration, loss control, training, etc.) that are currently offered through URMMA membership. 2. The City would need to absorb the cost of claims at the time they were settled, which would require the establishment of a reserve fund to handle the year-to-year lumpiness of claims payments. Other Considerations Policy Form. The City is currently is covered by URMMA on a claims made policy form, which means that the policy in force at the time a claim against the insured is asserted applies to the claim, regardless of when the occurrence forming the basis of the claim occurred. With an "occurrence" based policy, even though the policy may have expired as of the time the insured received notice of the claim, the policy will afford coverage if the claim otherwise comes within the scope of coverage. If the City were to switch to one of the alternatives being reviewed, the City may need to consider gap coverage depending on the policy form of alternatives to which the City may move. Claims Administration. The number of claims incurred by the City varies each year; however, the City is averaging approximately 30 claims per year for the last several years. Claims administration has a cost depending on the amount of involvement required by City personnel in
the claims handling process. Careful analysis of the claims handling process under each alternative will need to be made in order to accurately identify the associated cost. Recommendation Based on the comparison of alternatives and the fact that there appear to be more than one alternative that are both less expensive and provide better coverage, it is recommended that the City proceed with providing URMMA notice of intent to withdraw. Once notice has been given the City can consider a mechanism to further review the alternatives before selecting the best one.