HomeMy WebLinkAbout06-21-2016 Item 12 Authorization to move from CJPIA Primary Insurance Program to the Excess Insurance Program for Liability Coverage
Meeting Date: 6/21/2016
FROM: Monica Irons, Director of Human Resources
Prepared By: Greg Zocher, Human Resources Manager
SUBJECT: AUTHORIZATION TO MOVE FROM CJPIA PRIMARY INSURANCE
PROGRAM TO THE EXCESS INSURANCE PROGRAM FOR LIABILITY
COVERAGE
RECOMMENDATION
1. Authorize the City Manager to execute a Memorandum of Coverage (MOC) (Attachment A)
when final with California Joint Powers Insurance Authority (CJPIA) to participate in the
Excess Insurance Program for liability insurance coverage, subject to final approval as to
form and substance by the City Manager and City Attorney; and
2. Adopt a resolution delegating claim settlement authority to CJPIA (Attachment B); and
3. Authorize the City Manager to execute agreement with Carl Warren for third party
administration services for liability insurance program (Attachment C), subject to final
approval as to form and substance by the City Manager and City Attorney.
DISCUSSION
Background
The City of San Luis Obispo became a member of the CJPIA in 2003 for participation in the
liability program. Membership in the CJPIA means sharing risk with other member agencies.
However, the risk is shared among a large number of agencies, 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 number of agencies.
After ten years of participation in the CJPIA and with direction from Council, it was 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. This analysis was conducted and
presented to Council in April 2014 with the recommendation to remain in CJPIA. The City
currently has “first dollar” coverage, meaning that CJPIA pays all eligible claims with lower
financial risk associated with the coverage under the CJPIA and costs for this type of coverage
were competitive based on the quotes received and analysis conducted. However, insurance
costs continue to be significant for the City and cost increases are unpredictable based on the
pool’s experience, thus warranting continued evaluation as identified in Other Important Council
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Objectives – Fiscal Sustainability and Responsibility.
Since its inception, CJPIA has offered its members “first dollar” or Primary Insurance Program for
covered liability claims, meaning that there is no Self Insured Retention (SIR) or deductible. This
results in the full amount of the claim being allocated and shared by members in the pool, just as
other members’ claims costs are shared by the City of San Luis Obispo. Similar to our
evaluation of CJPIA costs, other member agencies in the CJPIA pool began exploring other
insurance funding models outside CJPIA. In an effort to address their member agencies’ request
for more insurance options, CJPIA realized the need to develop a separate Excess Insurance
Program (EIP), wherein EIP members no longer share the risk with all CJPIA member agencies
and are able to select an SIR level which best fits the EIP member’s claim experience resulting in
a discounted insurance premium. The newly developed EIP allows members to select from five
SIR levels ranging from $150,000 to $1.0 Million. The newly developed EIP is for Liability
coverage only. CJPIA will explore expanding the EIP for the Workers’ Compensation program
at a later time. When developed, staff will analyze the merits of moving to the EIP for Workers’
Compensation coverage, and will make a recommendation to Council at that time. Until then, the
City will remain in the primary insurance program and continue to receive “first dollar” coverage
for Workers’ Compensation coverage.
Based on an analysis of claims experienced and potential savings, staff recommends moving to
the EIP liability coverage, with a $500,000 SIR. A draft version of the MOC is provided in
Attachment A. CJPIA is working with staff on finalizing contract language as this report is being
written and CJPIA will take the MOC to its Executive Committee to review requested
modifications and for final approval on June 22nd. In order to join the EIP effective July 1,
2016, staff recommends Council authorize the City Manager to execute an agreement with Carl
Warren, the City’s current third party claims administrator, for continued third party claims
administration services under the EIP, as well as the MOC with CJPIA when finalized, subject to
City Attorney approval as to form and provided there are no significant substantive changes.
Primary Insurance Program vs. Excess Insurance Program
The City of San Luis Obispo has eleven years of claim experience with CJPIA’s Primary
Insurance Program. The concept of “pooling” risk means there is an allocation of costs among
all members in the insurance pool based on the pool’s claim experience, not the individual
agencies’ claim experience.
All costs, including third party claims administration fees, are allocated proportionally to all
members in the Primary Insurance Program. Historically, the City’s liability claim experience
has been relatively low (City normalized claim costs - $1.31 per $100 of payroll) compared to
other member agencies (Pool average normalized claim costs - $3.87 per $100 of payroll). In
fact, our annual contributions have averaged $1.3 million while the City’s claim experience has
only averaged $476,000. For many agencies “first dollar” Primary Insurance Program is
appealing because, in the event of a poor claim year, other agencies will help cover the claim
costs.
In the primary insurance program, costs are allocated based on both claim experience and agency
payroll. Agencies with larger payroll (exceeding $20 Million) and lower claim experience would
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potentially find moving to an EIP more advantageous. While there is no set methodology when
choosing an SIR level, some insurance experts recommend using the agency’s annual budget as a
base and applying 1% of that figure to set the initial SIR level. Using this methodology, the
City’s annual budget ($123 Million) would suggest that an SIR option up to $1 Million could be
appropriate. However, choosing a higher SIR is not recommended, as the additional discounted
premiums for the higher SIR are not sufficient when compared to additional potential exposure.
Based on claim experience, which is stratified into loss layers, an agency can also make a
determination on which SIR would be most appropriate. With the Primary Insurance Program
there is little direct correlation between individual claim experience and premium costs. With
the EIP there is a stronger correlation between loss experience and premium costs. This means
an agency that continues to have good claim experience can more directly impact savings in
premiums. Under the EIP a discounted premium would be charged to cover program costs,
pooled retention costs, and to purchase Excess Insurance which pay for claims that exceed the
pooled retention. In addition, claims administration fees would need to be paid directly to the
third party administrator, Carl Warren. Other program characteristic differences, described in
Attachment D, have been evaluated and, based on staff’s analysis of the City’s claim experience,
found acceptable.
Liability Claim Experience
While not a perfect predictor of future claims, the City’s best indicator is to look back at actual
claims data to estimate potential savings (or costs) under the EIP model. For the past eleven
years, the City’s liability claim experience has averaged approximately $476,000 annually. Over
99% of these claims fall under $150,000 per claim. Based on the lower severity of claims
experienced over the last eleven years, moving to the EIP with a $500,000 SIR would potentially
lower premium and claim costs compared to the current Primary Insurance Program. For
illustrative purposes, by overlaying prior claim experience with current annual premiums costs,
the savings could be substantial (average as much as $500,000 annually). If claim experience
changes significantly from the historical average, the City would have the option to reevaluate
and potentially choose a different SIR level. However, moving to the EIP would require a three
year commitment before the City would have the option of returning to the primary insurance
program for “first dollar” liability coverage.
How Would the EIP Work?
Rather than pay a $2 Million premium under the Primary Insurance Program for first dollar
coverage, the City would pay a discounted rate of $984,500 and move into the EIP with a
$500,000 SIR. In addition, the City would pay a claims administration fee of approximately
$42,000 annually based on the number and type of claims averaged during the past eleven years.
The money not spent on the current Primary Insurance Program premium would need to be set
aside or “designated” to pay any claims incurred under the SIR (i.e. less than $500,000) level
during the fiscal year. Since it takes approximately three years for claims to close, it would be
advisable to set aside a similar amount ($1.0 Million) annually for three years. Once a claim
year closes out, any extra funds that were set aside and not needed to pay for claims could be
used to defray insurance costs for that year or other purposes as directed by Council.
For example, under the EIP for fiscal year 2016-17, instead of paying approximately $2 Million
in premiums to CJPIA, the City’s premium would be reduced to approximately $1 Million
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allowing a set aside of approximately $1 Million. Claim year 2016-17 would likely close in
2019, at which time any funds set aside but not used to pay claims would be available for other
insurance costs or other purposes. Based on past experience average claim years, this could be
as much as $500,000; an amount that would have helped pay other members’ claims under the
Primary Insurance Program model.
Why CJPIA
Based on analysis, in April 2014 staff did not recommend moving to another Joint Powers
Authority (JPA) for EIP coverage. This was due to other JPAs not offering the “hands on” risk
management services, including claims administration, which would have required hiring
additional staff for claims management, legal services and claims settlement.
With CJPIA’s EIP, the City will have program continuity, the ability to utilize the same third
party administrator, and continue to have access to high caliber law firms that have represented
the City very well. The City historically has delegated authority to administratively process and
reject claims and, through our existing MOC, has delegated settlement authority to CJPIA. This
delegation has reduced staff time, and eliminated redundancies and the third party administrator
and CalJPIA staff have consistently worked collaboratively and effectively with City risk
management and legal staff. While the new EIP gives agencies the option to assume settlement
authority for most claims within the SIR, the option to continue with the current claim settlement
authority model is also available. For the past eleven years, staff has found the delegation of
claim settlement to work very well – CJPIA communicates regularly regarding claim status,
solicits staff and Council input on significant settlement decisions and is respectful of the City’s
input on claims and settlement decisions. Staff recommends Council adopt a resolution
(Attachment B) to continue to delegate claims settlement authority to CJPIA under the new EIP.
There are numerous other benefits that would come at no additional cost by remaining a member
of CJPIA and moving to the EIP. CJPIA 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 and enhances
the City’s overall risk management program that puts the City in position to consider moving
from first dollar coverage to an EIP. In addition, CJPIA provides access to legal advisors in the
area of employment law, workers compensation and liability claims.
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 the City 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.
Recommendation from these evaluations will be implemented with continued reduction in claim
experience as the ultimate goal. Doubtless these services have been a factor in t he City’s
liability claim history.
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FISCAL IMPACT
In the first three years the EIP would yield no cost reductions since the City will need to build up
the funds necessary to pay claims within its SIR level. After the third year in the EIP, based on
historical information, the City should experience significant cost reductions in the EIP when
compared to the primary insurance program assuming consistent claims experience.
ALTERNATIVES
Remain in the current Primary Insurance Program for liability claims. This alternative is not
recommended, since historically the City has paid three times its claim severity in premium costs,
whereas, the EIP allows for potential reduction in costs over current program.
Attachments:
a - Draft Memorandum of Coverage
b - Resolution for participation in excess insurance program
c - Draft Third Party Agreement
d - Program Characteristic Differences
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R ______
RESOLUTION NO. (2016 SERIES)
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN LUIS
OBISPO, CALIFORNIA, APPROVING EXECUTION OF AGREEMENT
FOR PARTICIPATION IN THE CALIFORNIA JOINT POWERS
INSURANCE AUTHORITY’S EXCESS INSURANCE PROGRAM
WHEREAS, the City of San Luis Obispo became a member of the California Joint Powers
Insurance Authority (CJPIA) in 2003 for participation in the liability primary insurance program;
and
WHEREAS, the CJPIA has developed a separate Excess Insurance Program (EIP), wherein
members may select a Self-Insured Retention (SIR) level which best fits claim experience; and
WHEREAS, the City of San Luis Obispo’s claim experience for the past eleven years
indicates moving to the EIP with an SIR of $500,000 could reduce insurance costs when
compared to remaining in the primary insurance program; and
WHEREAS, the City of San Luis Obispo’s current Memorandum of Coverage delegates
claim settlement authority to CJPIA, the EIP allows an agency to continue to delegate claim
settlement authority, and the City desires to do so;
NOW, THEREFORE, BE IT RESOLVED, by the City Council of the City of San Luis Obispo
as follows:
SECTION 1. The Council authorizes the City Manager to execute a Memorandum of
Coverage with CJPIA for participation in the liability EIP subject to final approval as to substance
and form by the City Manager and City Attorney.
SECTION 2. The City’s SIR for program participation shall be $500,000.
SECTION 3. The Council authorizes continued delegation of claim settlement authority
to the CJPIA for amounts up to and in excess of the City’s designated SIR.
SECTION 4. The Director of Finance shall establish a trust account and take all necessary
steps to ensure claim settlement amounts within the SIR are available for settlement and payment of
claims.
Upon motion of ______________________, seconded by ________________________,
and on the following roll call vote:
AYES:
NOES:
ABSENT:
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Resolution No. _____ (2016 Series) Page 2
R ______
The foregoing resolution was adopted this 21st day of June, 2016.
___________________________________
Mayor Jan Marx
ATTEST:
__________________________________
Lee Price, MMC
Interim City Clerk
APPROVED AS TO FORM:
__________________________________
J. Christine Dietrick
City Attorney
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the official seal of the City
of San Luis Obispo, California, this ______ day of ______________, _________.
______________________________
Lee Price, MMC
Interim City Clerk
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