HomeMy WebLinkAbout04/10/2003, 1 - INSURANCE UPDATE C 4
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C I TY OF S AN L U IS O B I S F O
FROM: Bill Statler,Finance Director
Prepared by: Karen Jenny, Risk Manager
SUBJECT: INSURANCE UPDATE
CAO RECOMMENDATION
Review and discuss the status of workers' compensation, liability and property insurance.
REPORT-IN-BRIEF
The costs for the City's three major insurance programs, workers' compensation, liability and
property insurance are increasing dramatically in.2003-04. Workers' compensation is increasing
over 50%, liability 42 % and property nearly 30%. These percentage increases total over $1.1
million and are as a result of higher claims experience and the tightening of the insurance
market. Although we are in the middle of a three-year contract for workers' compensation, one
alternative for the liability program is to join a different risk insurance pool.
DISCUSSION
The purpose of this report is to update the Council on the status of the City's three major insurance
programs: workers' compensation, liability and property. Based on preliminary estimates received
from the City's insurance brokers, significant cost increases are anticipated in 2003-04, and this
report will attempt to provide some historical context as well as explain the major reasons for the
increases..
Workers' Compensation
The Workers' Compensation program provides medical treatment and temporary and permanent
disability benefits for City employees who are injured on the job. The City self-insures for the first
$350,000 of any workers' compensation claim. Excess insurance for claims over $350,000 is
purchased through the Central Coast Cites Self Insurance Fund (CCCSIF), a Joint Powers
Authority (JPA) made up of eleven Central Coast cities. The member cities do not share risk,
but join together to obtain the additional coverage through the Local Agency Workers'
Compensation Excess Joint Powers Authority (LAWCX), another JPA established to provide
excess workers' compensation coverage to government entities. Coverage between $350,000 and
$500,000 is self-insured through participation in LAWCX, who then purchases for all its
members insurance in excess of$500,000 to the statutory limits. The City has been a member of
CCCSIF since 1978. Through CCCSIF, the City is in the first year of a three-year contract with
LAWCX for the excess workers' compensation coverage.
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Insurance Update Page 2 of 6
The City's cost for the Workers' Compensation program is estimated to be approximately $2.5
million in 2003-04, which is an increase of$847,000, or 51%, over 2002-03. This is on top of a
40% increase from 2001-02 to 2002-03. There are three major factors driving this cost increase:
1) AB 749, enacted last year, increased temporary and permanent disability benefits for
injured workers effective January 1, 2003. The maximum temporary disability benefit has
increased 23% from $490 per week to $602 per week. Temporary disability benefits will
increase another 21% on January 1, 2004, and another 15% on January 1, 2005. Many
injured workers qualify for the maximum benefit when they are temporarily disabled as a
result of an industrial injury. Permanent disability benefits are also increasing; especially
for the minimum amount payable for permanent disability.
2) Our claims experience has increased significantly over the past two years due to several
major injuries. During 2000-01 we had seven claims with expenses and reserves exceeding
$100,000 each. Five of the seven claims resulted in retirement of the injured employee and
one additional employee is on extended temporary disability with an uncertain return date.
During 2001-02 we had five claims with expenses and reserves exceeding $100,000 each
plus one claim exceeding $200,000. All of these injured employees except two were safety
employees who received a year of benefits under Labor Code 4850 and who did not return
to work.
3) The cost of excess insurance for 2003-04 is estimated to increase by 141% over 2002-03.
The excess workers' compensation insurance premium has been about 5% of the overall
cost of the program; in 2003-04 it will be 9%. As discussed in depth below, insurance rates
have steadily increased over the last few years because of the cyclical nature of the
insurance industry.
The chart below shows the cost of workers' compensation over the past ten years:
Workers' Compensation Program
3,000,000-
2,500,000-
2,000,000
,000,0002,500,0002,000,000
1,500,000
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Insurance Update Page 3 of 6
Liability Insurance
The City's liability insurance program also has two components: "self-insurance" for the first
$250,000 of any claim against the City and purchased excess liability insurance from $250,000 to
$10 million. Each year the City's self-insurance program administrator determines the self-
insured amount based on claims up to the point that the excess liability insurance begins to pay.
This portion of the annual premium is based upon the City's losses over a five-year rolling
average; consequently, the premium vanes each year. The other portion of the liability insurance
program is excess liability insurance.
For 2003-04, we expect our general liability costs to be $870,000, which is an increase of
$257,000, or 42% over 2002-03. This is on top of a 25% increase over the prior year. The
reasons are explained below.
For the past several years and prior to September 11, 2001, all segments of the insurance market
had been soft. This meant that prices for automobile, property and liability coverages and
workers' compensation declined or held steady for many insurance buyers, including local
government. Moreover, competition and very aggressive pricing by insurance companies over
the last few years also, until recently, gave rise to a "buyers' market".
As is the case with many other segments of the economy, the insurance market is cyclical. The
emphasis from 1988 until 2000 .was on reducing prices and selling insurance. After years of
competitive pricing, insurance companies began to see some "red ink" from the practice of
pricing insurance below losses and expenses. The decline in the stock market in early 2001
compounded by the events of September 11, 2001, drastically weakened the ability of the
insurance industry financially.
Insurance companies could not sustain continued losses, so they have been significantly
increasing premiums at renewal time. CCCSIF was fortunate to enter into a three year
agreement for the excess liability insurance beginning in fiscal year 2000-01, so we were able to
postpone some of the premium increases that we might otherwise have seen in 2001-02 and
2002-03. However, in fiscal year 2003-04 we are seeing the result of the "hardening" of the
insurance market and a resulting increase in the excess liability premium.
The following chart illustrates total liability insurance payments over the last ten years. The
"soft" insurance market can be seen in the mid-1990's. As costs began to rise in the late 1990's,
the City increased the self insured amount from $100,000 per claim to $250,000 per claim in
fiscal year 2000-01. Claims experience also influenced the cost of the liability program. Actual
claim costs are determined after the close of each fiscal year. If the amount set aside for "self-
insured" liability claims was greater than anticipated, the City can choose to pay that back over a
five year period.
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Insurance Update Page 4 of 6
Liability Insurance Program
900,000
800,000 --
700,000 i-
600,000
500,000
400,000-' - - - - - -� �-
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In addition to the excess premium increase, five claims within the.last four years(retaining wall
failure, labor relations lawsuit, fatality as a result of an alleged street design/defect, Mardi Gras
lawsuit and mobile home rent control lawsuit) have had expenses and reserves of $100,000 or
more each. Most of the expenses in these claims are for defense costs, although there are also
amounts reserved for potential awards/settlements. These four claims have had the most impact
on the self-funded portion of the liability premium for 2003-04.
Property Insurance
Property insurance rates also benefited from the "soft" insurance market over the last several
years. In addition to investment losses beginning in 2000, the property and casualty insurance
industry experienced significant catastrophic losses in 1999 and 2000 followed by the events of
September 11, 2001. As a result, the City's property insurance rate for 2002-03 doubled. At
about the same time, a representative of the property insurance program completed a site
inspection of major City facilities, which resulted in a significant increase in the value of some of
those properties. Although we do not anticipate as significant an increase in the premium rate
for 2003-04, the addition to the Marsh Street parking structure has increased the volume on
which the premium is based. Property insurance costs are charged to the enterprise funds, such
as the Parking Fund, through the Cost.Allocation Plan.
For 2003-04 we expect our property insurance premiums to be $127,400, which is an increase of
$29,000, or 29% over 2002-03. This is on top of a 160% (more than double!) increase from the
prior year.
The following chart illustrates property insurance premiums over the past ten years:
1 _ 4
Insurance Update Page 6 of 6
who share common goals of risk avoidance, claims control and transfer of risk in order to eliminate
or reduce exposure. By following proven practices of risk management, member agencies assist
each other in keeping the cost of claims down. By sharing risk, the cost to an agency for a year with
significant claims experience is somewhat mitigated and spread out over a four-year period. Each
member's cost of coverage is determined by its exposures and its actual loss experience. Similar to
our current practice with CCCSIF, a premium deposit is made at the beginning of the fiscal year and
retrospective adjustments are made based on the claims history following the close of the coverage
period. Retrospective adjustments are made over a four year period.
The initial cost estimate for participation in CJPIA's liability program for 2003-04 is estimated to be
between $150,000 and $240,000 less than staying with the CCCSIF liability program (meaning an
increase of $16,000 to $108,000 instead of over $250,000). Retrospective adjustments based on
loss history would not begin until 2005-06, so the cost would remain the same for both years of the
upcoming financial plan. Although the estimate from CJPIA is firm, we still would have some
administrative costs for CCCSIF; the amount of those costs will not be determined until CCCSIF
knows how many member cities will opt to go with CJPIA. This should be finalized at the next
CCCSIF board meeting on May 5.
While the cost savings in 2003-05 appear to be significant, we should not entertain a change in our
insurance strategy lightly. Currently, the City does not share risk with other agencies. We share
administrative costs in the areas of claims handling, accounting and program administration, and we
cooperatively purchase insurance for better access to the market (at lower costs). However, our
premiums (and those of the other CCCSIF members) are based solely on our own loss experience.
Additionally, because there are only eleven member cities, we play a significant role in the
governance of the CCCSIF.
If we join the CJPIA, both of these will change: we will share risk; and, because there are 91 other
agencies, we will play less of a governance role. On the other hand, there may be strategic
advantages in both the short-and long-run in joining a larger,more sophisticated insurance pool.
Lastly, it should be noted that for 2003-05, this change would only affect liability insurance; we
would still continue as CCCSIF members for workers' compensation. However, when our current
excess coverage contract with LAWCX ends in June 2005, we may want to consider other workers'
compensation options at that time. Other risk-sharing pools were considered by the CCCSIF Board
of Directors, but CJPIA is the most cost-effective option for the City of San Luis Obispo at this
time.
Where to from Here? We recommend continuing the process to join CJPIA's liability program
for 2003-04, assuming the Council is comfortable with risk-sharing and providing that the logistics
are favorable to the City. The mechanics of withdrawing from CCCSIF still need to be worked-out,
and the Council would need to adopt resolutions to formally make the change in liability programs.
We will be in a better position to make a formal recommendation to the Council following the
CCCSIF Board of Directors meeting on May 5.
G:)Agenda ReporiNnsurance Update April 10.Doc
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Insurance Update -Page 5 of 6
Property Insurance Program
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120,000
100,000 `
80,000
60,000
40,000 20,000
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FISCAL UVIPACT
Preliminary estimates from the City's insurance broker and the CCCSIF administrator indicate that
the Workers' Compensation program will cost $847,000 more in 2003-04; the liability insurance
program will cost $257,000 more in 2003-04; and, property insurance will cost $29,000 more in
2003-04. Workers' Compensation costs are allocated directly to departments, including the
enterprise fund payrolls. Liability and property insurance expenses are allocated to enterprise funds
through the cost allocation plan. Of the total organization-wide increase of$1,133,000, the General
Fund's share is about$880,000..
How Does this Compare with the Updated Forecast? The updated forecast assumes that overall
insurance costs in the General Fund would increase by about$600,000 from 2002-03. Based on the
initial estimates above, this would increase the "gap" by about $280,000. However, as discussed
below, we are considering an alternative that could reduce the increase in liability costs by up to
$240,000, which brings back the overall increase closer to our more recent estimate. Additionally,
we are exploring other cost containment options for worker's compensation with the CCCSIF. In
summary, this is one of many variables affecting our outlook for 2003-05, and until the May 5
Board meeting, it is too soon to"finalize"our 2003-05 insurance budget.
ALTERNATIVES
One alternative being considered for liability insurance is withdrawing from the liability program
with CCCSIF and joining the California Joint Powers Insurance Authority (CJPIA). CJPIA is based
in Southern California and is comprised of 91 member agencies, including 82 cities. The average
CJPIA member has a population of 30,000. In addition to providing a broad array of insurance
coverages, CJPIA assists members in risk assessment and mitigation and conducts training seminars
on a variety of risk management topics. CJPIA provides liability coverage from the first dollar of
any claim and manages the claims on behalf of member agencies.
Unlike the CCCSIF, where members do not share risk, membership in CJPIA would mean sharing
risk with other member agencies. However, the risk is shared among a large number of agencies,