HomeMy WebLinkAbout04-15-2014 B1 CJPIA Alternatives
FROM: Monica Irons, Human Resources Director
Prepared By: Greg Zocher, Human Resources Manager
SUBJECT: EVALUATION OF JOINT POWERS INSURANCE AUTHORITY (JPA)
OPTIONS AND RECOMMENDATION TO CONTINUE THE CITY’S
MEMBERSHIP IN THE CALIFORNIA JOINT POWERS INSURANCE
AUTHORITY (CJPIA)
RECOMMENDATION
Continue membership in the CJPIA for Liability and Workers’ Compensation self-insurance programs.
REPORT-IN-BRIEF
The major city goal work program to Sustain Essential Services, Infrastructure, and Fiscal Health
included a commitment to evaluate potential alternatives to the City’s membership in the CJPIA for
workers’ compensation and liability coverage. The analysis provided in detail below indicates that the
City has excellent coverage under the CJPIA and costs are competitive in comparison to the JPAs
considered. The CJPIA provides “first dollar” coverage for covered liability and workers’
compensation claims, meaning that there is no City self-insured retention (SIR) deductible. The CJPIA
has financial responsibility for covered liability claims and lawsuits up to $50 million for liability and
up to statutory benefits for workers’ compensation. As a member of the CJPIA, the City has access to
purchase ancillary insurances at group rates. City employees have access to numerous training
opportunities that meets OSHA and other legal requirements or provides employee development, at no
additional cost. Additionally, CJPIA provides access to legal advisors in the area of employment law,
workers compensation and liability claims.
For the most part, other JPAs evaluated would charge more and provide less coverage. Using the five-
year median claims experience, only one JPA offered an immediate minor cost savings to the City.
However, based on the five-year high claims experience, costs are estimated to increase by as much as
3% over what the City is currently paying. When other factors such as lower levels of protection in the
event of a catastrophic loss and volatility in cash flow are considered, the cost-benefit is not attractive.
There is also the risk that the City could experience one or more catastrophic losses (severe high dollar
claims), which would result in substantially higher costs. While the potential savings are small the risk
and potential cost is high; therefore, staff recommends remaining with the CJPIA for liability and
workers’ compensation coverage.
DISCUSSION
Background
In June 2003, the City Council approved joining the CJPIA liability self-insurance program and the
following year the City joined the CJPIA workers’ compensation self-insurance program. After ten
Meeting Date
Item Number 04-15-14
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years of participation in the CJPIA and with direction from Council, staff has been exploring
alternatives to the CJPIA with the objective of potentially reducing costs, while effectively managing
the City’s risk and protecting the City’s assets.
The City retained the services of Municipal Resource Group (MRG) to provide expertise and
assistance in evaluating options and alternatives to membership in CJPIA. A stakeholder committee
consisting of representatives from various City departments was convened to provide input on the
project as well as to communicate updates about the project to their respective departmental
workgroups. Based on input from the City Manager and the stakeholders committee, MRG developed
a set of criteria to be considered by the City in evaluating the needs of the City and potential
membership in alternative JPAs.
On January 21, 2014 staff brought to Council options to cover the City’s liability and workers’
compensation exposures. These included the following:
(i) self-insure independently up to an acceptable level of risk and purchase “excess” insurance
to cover high dollar amount claims;
(ii) self-insure up to an acceptable level of risk and join a joint-purchase JPA for excess
insurance; and
(iii) join a risk-sharing JPA that offers an acceptable self-insured retention level (deductible, per
claim).
Based on the characteristics of the City of San Luis Obispo (budget, staffing levels, and risk
management needs), Council supported staff’s recommendation to explore the risk sharing JPA model.
There are many risk-sharing JPAs that have been established in the State of California. In order to
narrow the search for a JPA that is best suited to serve our City’s needs, staff recommended and
Council approved the following criteria and qualifications for JPAs to be considered by the City:
• The JPA is accredited by the California Association of Joint Powers Authorities (CAJPA).
CAJPA is a statewide association of insurance/risk management pools, and the sponsor of the
accreditation program. Accreditation involves a detailed evaluation of the JPA’s governing
documents, rules, insurance coverage, accounting, financial and investment practices, funding
and actuarial standards, risk control programs, claims management and administrative
management.
• The JPA should offer both liability insurance (including ancillary insurances such as
environmental, pollution, property, and special event) and workers compensation insurance
coverage. This criterion is based on a goal of maintaining administrative efficiency and
avoiding staff duplication of effort that may occur by belonging to two JPAs.
• The JPA should offer active risk management, loss control and safety programs to its members.
• Public agencies that are members of the JPA should generally provide the same types and range
of services as the City of San Luis Obispo, such as public safety and enterprise/utility services,
in order to ensure appropriate risk management support. Public safety in particular brings a
unique set of risk exposures to an agency. It is common for JPAs to separate claims associated
with public safety into their own cost allocation formula. The JPA should include other
agencies with public safety in order to provide an adequate pool size to share risk.
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• The JPA should be financially sound and maintain appropriate confidence levels (typically 70-
75%) to pay for claims.
• The JPA and its member cities should have a reputation for responsible risk management and
City management.
• The JPA’s memorandum of coverage should be sufficiently broad to adequately cover the
City’s most significant risk exposures. Limits of coverage for specific exposures should be
sufficient as well.
Qualitative Review of Quotes
Staff and MRG identified eighteen possible JPAs that could potentially be considered. Using the above
criteria and qualifications staff narrowed down the list of JPAs and sent requests for “soft premium
quotes” to the following seven agencies:
1) Public Entity Risk Management Authority (PERMA)
2) Public Agency Risk Sharing Authority of CA (PARSAC)
3) Municipal Pooling Authority of Northern CA (MPA)
4) Independent Cities Risk Management Authority (ICRMA)
5) CSAC Excess Insurance Authority (CSAC)
6) Northern California Cities Self Insurance Fund (NCCSIF)
7) Central San Joaquin Valley Risk Management Authority (CSJVRMA)
The City provided a ten-year history of the City’s liability and workers’ compensation loss experience
and a five-year history of the City’s payroll for the JPAs to evaluate and provide soft premium quotes
(estimates of the potential required deposit or annual premium). In addition to the request for soft
premium quotes, each JPA was asked to fill out a questionnaire identifying other features and attributes
of the JPA, including the number of members, the characteristics of the members (i.e. contract or full-
service cities), the governance structure, financial information, and a brief description of their loss
control, risk management and safety programs. NCCSIF declined to provide a quote, stating the
geography barriers were too great to provide the City with the customer service our agency needs.
Each quote and questionnaire received was carefully reviewed and follow-up calls were made as
needed to ensure adequate information to evaluate. Attachment 1 provides a summary numerical
rating of each JPA based on the City’s initial evaluation criteria. A score of 3 was given if the JPA
provided as much or more coverage or service than CJPIA or coverage was deemed acceptable, and a
score of 1 was given if the JPA did not provide adequate coverage or the coverage was substantially
lower than CJPIA. A lower ranking would also apply if described services were lesser than CJPIA or
if the JPA did not meet the City’s other qualitative criteria. Based on the “scores” from this initial
analysis of whether the JPA meets the City’s criteria, it appears as though MPA offers the most
appropriate coverage for the City to consider. However, each JPA received at least one score of 1
indicating an area of concern. Concerns identified were varied and are described below.
All of the JPAs provide both liability and workers’ compensation coverage. Likewise, all but CSAC
provided active risk management, loss control and safety programs to its members. CSAC takes a
more “hands off approach” to involvement in member agency’s risk management programs and
requires member agencies to initiate any request for risk management assistance. In most cases,
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member agencies also deal directly with CSAC’s insurance broker before being able to contact CSAC
staff directly. The City currently receives a comprehensive risk management program from CJPIA that
includes a risk management evaluation every three years. The risk management evaluation conducted
by CJPIA results in a Loss Control Action Plan (LossCAP) which is designed to assist member
agencies in addressing areas in which risk exposure indicates the need for changes to the City’s
operations. The LossCAP provides recommendations based on a review of various aspects of City
operations including: policies, procedures, contracts, agreements, insurance and risk transfer, and
facilities and infrastructure.
Based on responses to our questionnaire, staff found that MPA and ICRMA were made up of member
agencies that are similar to San Luis Obispo in size (population and payroll) and services (including
public safety and utilities). PERMA, PARSAC, and CSJVRMA had member agencies that have
smaller population and payroll size. CSAC’s liability and workers’ compensation pools consisted of
mostly County agencies and very few Cities that were similar to our agency.
Having a financially sound program that maintains appropriate confidence levels (typically 70-75%)
was another important criterion in evaluating alternatives to CJPIA. A confidence level is a
methodology for establishing contingency margins and evaluating financial solidity. It measures the
probability that the actual losses will be less than or equal to the JPA funding amount on hand. The
CJPIA has transitioned to 75% confidence levels for both workers compensation and liability
programs. While CSAC had a strong liability program (87% confidence level), the workers’
compensation program is currently funded at a 60% confidence level. In addition, CSAC has collected
two retrospective workers’ compensation program assessments from member agencies in recent years.
ICRMA had a strong workers’ compensation program (80% confidence level); however, the liability
program is currently funded at 70% confidence level.
A memorandum of coverage that sufficiently and adequately covers the City’s risk exposures is
another criterion of importance to the City. In addition, the limits for specific exposures should be
sufficient as well. With the exception of PERMA, the program limits for coverage offered by the
remaining JPAs range from $25 - $35 million, compared to $50 million offered by the CJPIA. While
the City has never had a claim which exceeded $25 million, there is always the risk of a lawsuit
resulting in a high dollar settlement or judgment. With the exception of CSJVRMA and MPA, the
JPAs’ liability programs exclude claims involving land movement (land subsidence liability), or offer
coverage that is substantially lower than the $25 million the City currently has with the CJPIA. No JPA
was able to provide comparable coverage to the CJPIA for Employment Practices Liability (EPL).
This coverage protects the City in the event of claims of wrongful termination or discipline, breach of
an employment contract, and employment discrimination or harassment. Coverage for EPL ranged
from lower coverage limits, higher SIRs or was excluded completely from memorandum of coverage.
Another important criterion used in evaluating alternatives to the CJPIA was that the City would be
able to actively participate in JPA governance matters. CSAC’s liability and workers’ compensation
programs mainly consist of County agencies. The CSAC Board consists of the 54 county members and
7 other public entity members from among 254 non-county members. Two non-county public entity
members sit on the eleven-member Executive Committee. The City of San Luis Obispo would most
likely not have much influence in this governance structure.
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Financial Review of Quotes
The next level of analysis staff conducted focused on a financial analysis of the soft premium quotes
received from the JPAs. In order to conduct an “apples to apples” financial analysis of the quotes, staff
estimated the additional City costs expected to be incurred within each different SIR level, and
estimated the costs for services or coverage not included in the quote as described in the next section of
this staff report. Quotes received are assumed to be the primary deposits if the City transitioned to a
different JPA effective July 1, 2014 and therefore, the JPA quotes are compared to the City’s 2014
Primary Deposit to the CJPIA due on July 1, 2014. Attachment 2 summarizes the comparative
analysis of costs between CJPIA and the six JPAs for the liability and workers’ compensation
programs. Note that CSAC submitted two proposals, each of which have different SIR levels.
It is also important to note that transitioning away from the CJPIA may require more than simply a
deposit with the new JPA. Per our agreement with CJPIA, all existing claims would stay with the
CJPIA and costs associated with those claims would remain. This concept is referred to as “tail
claims” and while costs associated with these claims have been funded to the 75% confidence level,
there is the possibility that retrospective adjustments could be required over the life of those claims.
This could result in an additional CJPIA charge or credit as the claims develop. The existing CJPIA
Retrospective Deposit that the City is paying over the next five years would also be due and payable at
the time the City transitioned from the CJPIA. The potential tail claim costs and Retrospective Deposit
have not been considered in the analysis below and would be added costs.
1. Self-Insured Retention Levels
The City currently has “first dollar” coverage for covered liability and workers’ compensation claims,
meaning that there is no SIR or deductible. This means the full amount of the claim is currently
allocated to the CJPIA pool and shared amongst other member agencies, just as their claims’ cost are
shared by San Luis Obispo. Differing levels of SIR, ranging from “first dollar” coverage to a $350,000
SIR, are offered by the JPAs that submitted premium quotes. A SIR is similar to a deductible in that if
the SIR is $100,000, the City is responsible for fully paying claim costs up to $100,000 before
remaining costs are allocated among JPA members. Generally, a higher SIR will lead to a lower
premium, but the additional costs of the expected claims with a value falling within the SIR level must
also be added to the premium quote to determine the overall cost. In order to present an accurate
comparison between existing costs associated with CJPIA “first dollar” coverage (no SIR) and quotes
from the JPAs with SIRs, the last five years of City loss history for both liability and workers’
compensation were used to identify the potential costs the City would need to cover within each SIR.
Staff calculated the median costs and highest year costs associated with different SIR levels and
adjusted quotes received accordingly to reflect five year median and a five year high “worst case”
scenarios based on the City’s most recent five years’ claim experience.
These adjustments are reflected in Attachment 2. Recognize that in the event the City has a year of
poor loss experience that exceeds the prior five year average, the cost associated with having a SIR
could be substantially higher than assumed in our analysis; alternatively if the loss experience is better
than the past five years average, the overall cost of having a SIR would be less than the amounts
assumed in our analysis. Because of this, a high SIR is a potential source of volatility of costs to the
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City, because the City must absorb all costs within the SIR as they occur. A low- or no-SIR has the
ability to “smooth” annual costs, because premiums are based on several years’ loss experience.
2. Additional Cost Adjustments
The CJPIA Premium Deposit includes all costs associated with administering the liability and workers’
compensation programs. This includes costs associated with contracting for third party administration,
state workers’ compensation assessments, training, risk management evaluations and annual actuarial
studies. For JPAs that do not include one or more of these costs, staff has estimated the additional costs
based on the quotes provided.
The premium deposits for PARSCA, MPA PERMA and CSJVRMA were only adjusted for actuarial
costs because they provide the full range of services needed. ICRMA and CSAC would require
additional staff to actively manage our risk management program. With first dollar coverage, most
JPAs (and in our current case, CJPIA) supervise and monitor the third party administrators (TPAs)
who handle liability and workers’ compensation claims, to ensure that they are acting in the City’s best
interests, using the best risk management practices and procedures, and remaining in compliance with
current regulations. With a high SIR, it is in the City’s interest to take a proactive part in managing the
TPAs, as it is only City dollars at risk within the SIR, not JPA dollars. In addition, some JPAs require
the agency to contract directly for and manage TPA services. In these instances, staff resources would
be required to manage the TPAs, conduct internal claims processing, set appropriate reserves and
account for the potential liability in the City’s financial documents. Internal staff resources would also
be dedicated to thoroughly evaluate claim trends and estimate the cost of future claim development.
Our analysis has included an estimate for the additional staff costs associated with high SIR levels, and
for managing TPAs where required. These estimated costs are reflected in Attachment 2 under
“Additional Costs to the City”.
Conclusion
Liability and workers’ compensation costs are significant for the City. However, this analysis
indicates that the City has excellent coverage under the CJPIA and costs are competitive based on the
quotes received and analysis conducted. In fact, for the most part, other JPAs would charge more and
provide less coverage. Only CSAC offers an immediate, albeit small, apparent cost savings to the
City. As outlined in the section above, staff had significant concerns and ranked CSAC the lowest
based on the qualitative factors approved by Council. However, factoring in other criteria and costs,
the estimated savings ranging from 0.5% to 3% of the City’s current premium, does not warrant a
change to CSAC at this time. Using the last five years high claims experience alone as the basis to
change JPAs could increase costs by 1.2% to 3% over what the City is currently paying. Changing
from “first dollar” coverage to a JPA with an SIR is a gamble. There is also the risk that the City could
experience one or more catastrophic losses (severe high dollar claims), which would result in no
savings but rather in substantially higher costs.
This analysis has been productive in that it indicates the coverage and the cost associated with the
City’s liability and workers’ compensation programs through the CJPIA is reasonable when compared
to similar coverage through other JPAs. However, the City’s costs associated with liability and
workers’ compensation coverage with the CJPIA continue to increase. Staff anticipates conducting a
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thorough analysis of claims and loss history to identify trends in frequency, commonality, and severity
of losses that may indicate how the City can further proactively address losses. Given staff workloads
and competing priorities, it is likely this in depth analysis will be conducted by a consultant if not
available through CJPIA resources.
FISCAL IMPACT
There is no fiscal impact associated with this report.
ALTERNATIVES
1. Direct staff to pursue application process with another JPA to cover liability and workers’
compensation programs. This alternative is not recommended due to the increased cost, staff
time and lower insurance coverage.
ATTACHMENTS
1. CJPIA Criteria and Qualification Ranking
2. Analysis of Costs
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Attachment 1
PERMA PARSAC MPA ICRMA CSAC CSJVRMA
JPA offers both Liability and
Workers’ Compensation Coverage 3 3 3 3 3 3
JPA offers “hands on” Risk
Management Program 3 3 3 3 2 3
JPA members would be made up of
agencies similar to San Luis Obispo in
size and services
1 1 3 3 1 1
JPA confidence levels between
70-75% for both programs 3 3 3 2 1 3
Liability Program limits meet City’s
existing limit 3 1 1 1 1 1
Land Subsidence Insurance provided 1 2 3 1 1 3
Participation in JPA governance 3 3 3 3 1 3
TOTAL 17 16 19 16 10 17
JPA Criteria and Qualification Ranking
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Attachment 2
CJPIA
PERMA -
Public Entity
Risk
Management
Authority
PARSAC -
Public Agency
Risk Sharing
Authority of CA
MPA -
Municipal
Pooling
Authority of
Northern CA
ICRMA -
Independent
Cities Risk
Management
Authority
CSAC -
Excess
Insurance
Authority
CSAC -
Excess
Insurance
Authority
CSJVRMA
Central San
Joaquin Valley
Risk
Management
Authority
Liability Program Limit $50
Million $50 Million $35 Million $29 Million $30 Million $25 Million $25 Million $29 Million
Liability Self Insured
Retention (SIR)-$ -$ 25,000.00$ 50,000.00$ 100,000.00$ 10,000.00$ 100,000.00$ 10,000.00$
Workers' Compensation
Self Insured Retention
(SIR)10,000.00$ -$ 350,000.00$ -$ 125,000.00$ 10,000.00$
Liability & Workers' Comp
Primary Deposit
3,089,282 3,358,571 3,402,685 2,962,728 1,349,171 2,615,000 1,275,000 3,324,275
Additional Cost to City 12,000 12,000 435,500 342,000 453,000 12,000
Primary Deposit Total 3,089,282 3,358,571 3,414,685 2,974,728 1,784,671 2,957,000 1,728,000 3,336,275
5 Year Median Tru-Up Cost
to Account for SIR
0 425,626 299,789 1,367,119 119,170 1,265,682 0
5 Year High Tru-Up Cost to
Account for SIR
0 470,579 337,424 1,879,681 168,999 1,456,750 63,315
Additional (Cost) or
Potential Savings Based
on 5 Year Median (269,289)(751,029)(185,235)(62,508)13,112 95,600 (246,993)
Additional (Cost) Based
on 5 Year High
(269,289)(795,982)(222,870)(575,070)(36,717)(95,468)(310,308)
Analysis of Cost
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