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HomeMy WebLinkAboutb2cjpiaalternatives FROM: Monica Irons, Director of Human Resources Prepared By: Greg Zocher, Human Resources Manager SUBJECT: UPDATE ON PROJECT TO EXPLORE ALTERNATIVES TO THE CITY’S MEMBERSHIP IN THE CALIFORNIA JOINT POWERS INSURANCE AUTHORITY (CJPIA) RECOMMENDATION Receive an overview of models for Risk Management Programs and provide direction on pursuing Risk Sharing Joint Powers Authorities (JPA’s) as an alternative to membership in the CJPIA. DISCUSSION Background In June 2003, the City Council approved joining the CJPIA liability program. Prior to joining the CJPIA, the City had been a member of the Central Coast Cities Self Insurance Fund (CCCSIF). The CCCSIF was comprised of eleven Central Coast Cities that did not share risk for claims or legal costs, but had joined together primarily to share administrative costs and to obtain excess worker’s compensation and liability coverage, as well as other special insurance coverage, such as environmental, property, and special event tenant liability insurance. The majority of representatives to the CCCSIF Board of Directors voted to join CJPIA and move the liability insurance program to CJPIA. The CCCSIF workers’ compensation program contractual obligations delayed the move to the CJPIA for workers’ compensation coverage until 2004. Unlike the CCCSIF, where members did not share risk, membership in the CJPIA meant sharing risk with other member agencies. However, the risk is shared and spread among approximately 122 agencies, who share the common goals of risk management, risk avoidance, claims control and transfer of risk in order to reduce or eliminate exposure. The CJPIA provides “first dollar” coverage for covered liability and workers’ compensation claims, meaning that there is no City self-insured retention (SIR) or deductible. This means the full amount of the claim is allocated to the pool and shared amongst other member agencies. The CJPIA has financial responsibility for covered liability claims and lawsuits up to $50 million per occurrence and annual aggregate per member, and up to the statutory benefits for workers’ compensation claims. CJPIA also provides access to ancillary insurance coverages at reduced group rates. The City currently takes advantage of many of these insurance options including: environmental and pollution, property, fidelity and special event insurance. CJPIA offers numerous training opportunities that meet OSHA or other legal requirements. For 2012-13 City employees attended 60 training sessions that equated to approximately 6,000 hours in required training. Last year CJPIA provided third party claims administration for over 80 liability claims and 120 workers Meeting Date Item Number January 21, 2014 B2 - 1 Alternatives to CJPIA Page 2 compensation claims. In addition, CJPIA provided access to legal advisors in the area of employment law, workers compensation and liability claims. In past years, CJPIA members contributed initial annual deposits for the liability and workers’ compensation programs based on each city’s risk exposure and past claims experience. Deposits have been retrospectively adjusted annually as each city’s claims’ experience develops, and cities make annual retrospective payments to CJPIA. However, CJPIA is transitioning to a prospective contribution funding model, which requires higher initial payments but no routine annual retrospective adjustments once the transition is complete. Initial payments are adjusted based on the cities prior claims experience. In addition to the insurance coverages described above, the CJPIA also provides a comprehensive risk management program that includes a risk management evaluation every three years. The risk management evaluation results in a Loss Control Action Plan (LossCAP) which is a comprehensive program designed to assist our agency 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, facilities and infrastructure. After ten years of participation in the CJPIA and with direction from Council, it is appropriate to explore alternatives to the CJPIA with the objective of reducing costs while effectively managing the City’s risk and protecting the City’s assets. Actions Taken To Date 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 JPA’s. Methodology Public agencies basically have three options to cover their liability and workers compensation exposures. 1. Self-insure up to an acceptable level of risk and purchase Excess Insurance independently 2. Self-insure up to an acceptable level of risk and join a Joint Purchase JPA to acquire Excess Insurance 3. Join a risk sharing JPA that offers an acceptable self-insured retention level Model 1 – Self-insure and Purchase Excess Insurance Independently Purchasing Excess Insurance independently allows an agency to obtain insurance that would cover claims that exceed the SIR. The higher the SIR the more risk the agency assumes, to cover claim costs. For example, if an agency had a $500,000 SIR and a claim for $270,000, the agency would be required to pay the full amount of the claim. However, if that same agency had a claim for $600,000, the agency would pay the first $500,000 and the remaining cost would be paid by the excess insurance. The SIR must be paid for each claim until the annual aggregate is met. B2 - 2 Alternatives to CJPIA Page 3 The advantage to this model is that good claims experience results in lower cost for claims settlement, and potential stability in excess insurance premiums. In addition, the agency would not be subject to any potential negative impacts associated with a risk sharing pool in the event another member agency has poor loss experience. Conversely, if an agency in this model has a poor claim experience, it would incur the full cost within the SIR, with no means of sharing the SIR costs. This approach requires the organization to have the cash flow to pay claims until the SIR is reached, at which point the excess insurance covers additional costs. Claims history can fluctuate and thus, cash flow may fluctuate as well. This model would require the retention of third party administrators to handle worker’s compensation and liability claims. In addition, an insurance broker would be retained to assist the City in acquiring excess insurance coverage. Staff resources would be required to manage the claims administrators and broker, conduct internal claims processing and 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 claims exposures to establish appropriate SIR’s. The cost of excess insurance is driven by experience and therefore, in years where losses are high, increases in excess insurance premiums may follow. Importantly, risk management, safety, training and loss control would be entirely the responsibility of the individual agency. Because of the internal resources necessary to effectively manage risk under this model, as well as potential significant fluctuations in cash flow depending upon claims experience, this model was not found to be popular with agencies of similar size to the City. Model 2 – Self-insure and Join a Joint Purchase JPA Joining a Joint Purchase JPA would be similar to the CCCSIF model that the City of San Luis Obispo was part of prior to joining the CJPIA. Agencies pool resources to retain an insurance broker, purchase excess insurance, pay for third party claims administration, and provide required safety training. However, similar to Model 1, claims costs are not shared by the member agencies, so an agency would experience more cash flow volatility in claims costs in any given year. A Joint Purchase JPA has the ability to pool resources to obtain and pay for risk management resources, claims administration (including setting reserves, defense litigation costs, etc.), safety training, and loss control measures collaboratively, which would likely be at a lower cost than a single agency might otherwise incur. Even though the City was at one time part of a Joint Purchase JPA, the legal climate has changed over the past decade for liability and workers’ compensation claims. Medical costs have increased substantially resulting in the employer paying higher workers’ compensation expenses. In the area of liability coverage, Joint and Several Liability laws often result in an agency not primarily at fault making substantial payments to claimants. Covering all costs up to the SIR for each claim make this Model less attractive to many agencies that are not able to support the cash flow volatility associated with this risk financing model. In 2003 when the City of San Luis Obispo decided to move to CJPIA, workers compensation costs were set to increase by more than 50%, liability costs by 42%, and property insurance by 30%. Excess insurance premiums continually increased, forcing the CCCSIF member agencies to switch to higher levels of SIR to avoid increased premium costs. Even with those cost avoidance measures, by the final year in CCCSIF the excess insurance premiums had increased 141%. Staff is not recommending this model for the same reasons CCCSIF dissolved. B2 - 3 Alternatives to CJPIA Page 4 Model 3 – Join a Risk Sharing JPA Joining a risk sharing JPA allows an agency to be part of an insurance pool wherein the cost of claims are shared with other agencies based on a funding allocation established by the JPA. While required contributions from member agencies, whether prospective or retrospective eventually reflect each agency’s claims experience, a risk-sharing JPA has the ability to “smooth” the required contributions over several years, minimizing the cash flow volatility and providing more predictable cash flow. This is typically accomplished by the JPA establishing financial policies that ensure the JPA has the assets to pay claims in a timely manner. Many JPAs, for example, establish a “confidence” level of 70% - 75% or higher to ensure adequate funds are available to pay claims. Similar to the first two models, risk sharing JPA’s purchase excess insurance, but typically at a higher level and lower cost than Model 1, and therefore the premiums are more reasonable. For example, a pool that shares risk may select excess insurance at $5 million because they have pooled assets to cover lower cost claims. Many risk sharing JPAs allow member agencies to select from a variety of self-insured retention levels, ranging from zero (first dollar coverage) to a high dollar amount, with annual contributions adjusted based on the selected self-insured retention level. Risk sharing JPA’s provide third party administrator services, which are typically allocated to members based on claims costs. Joint risk management, safety, training, loss control services, claims administration, legal defense are typically provided by the JPA, with costs included in the annual contribution. Ancillary insurances, such as environmental and pollution, property, fidelity bonds and special event insurance are made available at reduced group rates. Because of cash flow volatility and the inherent risks associated with the costs required to fund and support either Model 1 or Model 2 (purchasing Excess Insurance independently or joining a Joint Purchase JPA), staff believes it would not be advisable to pursue those options. The City of San Luis Obispo does not currently have the staff resource infrastructure needed to support Model 1 or Model 2, nor does staff believe it will be cost effective or prudent to hire the number of staff that would be necessary to implement these models. The JPA model comes with the needed infrastructure required to administer a risk management program. In addition, funding would need to be available to cover immediate claims payments for the first two models. In this model, the JPA collects and retains the funds needed to pay claims at set confidence levels, allowing agencies to plan for and budget annual contribution amounts. Based on the characteristics of the City of San Luis Obispo (budget, staffing levels, and risk management needs), the recommendation is 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, the recommended criteria and qualifications for JPAs to be considered by the City include all the following: • 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 B2 - 4 Alternatives to CJPIA Page 5 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. • 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. It is noted that these criteria and qualifications would be used to narrow the list of JPAs that will be further evaluated in the next phase of this project. In narrowing the list of JPAs, a JPA could receive preference if it offered the option to select different self-insured retention levels periodically, based on the member agency’s experience and risk tolerance. The subsequent evaluation will identify more specific information on premiums, retrospective practices, self-insured retentions, coverage exclusions, risk management programs, governance, customer service and other criteria, characteristics and attributes of the JPAs. Next Steps or Where to from Here Upon Council approval, staff will continue to work with MRG to begin researching the risk sharing JPAs that meet the criteria and qualifications to obtain detailed information in order to make an informed recommendation. JPAs do not typically respond to a Request for Proposal but require an interested agency to submit an application. The application process is an opportunity for the JPA to vet an agency based on risk management practices, loss history, and other factors. Applying for membership can be time consuming for both parties and may have fees associated. Therefore, the following steps will be pursued to narrow the list of JPAs and determine if an application is recommended. An application would only be submitted following Council approval. 1) Staff will work with MRG to research and interview JPAs that meet the criteria established above. 2) As part of the research and interview process staff would ensure potential challenges such as our geographically isolated location would be addressed by the JPAs in the area of training, claims investigations, and on-site risk management analysis. 3) Cost allocation formulas would be reviewed to determine potential cost for the City to join the pool. 4) Contact agencies in the pool for references regarding satisfaction with JPA’s services. B2 - 5 Alternatives to CJPIA Page 6 5) Staff will evaluate these results with the stakeholders group and compare findings with current coverage with the CJPIA. 6) Staff anticipates returning to Council in April 2014 to present these findings and for direction on whether to pursue an application process with an alternative JPA to meet the City’s liability and workers compensation insurance needs. FISCAL IMPACT There is no fiscal impact in obtaining additional information to help determine whether the alternative JPA will meet the needs of the City. ALTERNATIVES 1. Direct staff to include Model 1 and/or Model 2 as an option to cover liability and workers compensation programs. This alternative is not recommended due to the cash flow volatility in costs and additional staffing required to support either of these models. B2 - 6