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HomeMy WebLinkAboutAgenda Statement 1986/03/18 Item 9 COUNCIL AGENDA STATEMENT Item 9 Meeting Date 3/18/86 ITEM TITLE: Resolution 12410 Authorizing the City to enter into a risk pooling arrangement for general liability SUBMITTED BY: Director of Financea REVIEWED BY: City Manager 14j (4/5ths Vote: Yes No X ) The San Diego County Cities Risk Management Authority (RMA) of which Chula Vista is a member, was recently notified that Planet Insurance will not renew general liability insurance coverage for the Authority. The cities insurance coverage will expire as of March 31 , 1986. The purpose of this report is to discuss some of the alternatives available to the RMA and the individual cities. RECOMMENDATION: That Council accept the report and approve entering into a risk pooling arrangement for general liability with other cities in San Diego County. BOARDS/COMMISSIONS RECOMMENDATION: Not applicable. DISCUSSION: The number of California cities unable to purchase general liability insurance has grown at an alarming rate. Since the beginning of 1985, it is estimated that over 200 cities have been unable to purchase necessary liability insurance. Although the alternatives are limited, staff is evaluating possibilities in the following basic areas: I. Other insurance market. II. Self-insurance. III. Risk pooling arrangement. a. California Municipal Insurance Authority (CMIA). b. San Diego County Cities Risk Management Authority (RMA). Following is a discussion of these areas: I. Other Insurance Market. Our insurance broker, Robert F. Driver Company has submitted information to two insurance markets other than Planet Insurance to determine if another company would be willing to offer insurance to the RMA or any of the individual member cities. Our broker indicates it is highly unlikely that there will be an offer of insurance from another market but, if there is, it will certainly be in the form of a higher self-insured retention, higher premium, and reduced coverage. Page 2, Item 9 Meeting Date 3/18/86 II. Self-Insurance. Self-insurance, or "going bare", involves total assumption of risk and retention of risk by the individual city. Advantages. 1 . No large sums in the form of a premium going to a third party insurer. 2. No assumption of other cities risk in having to pay for their poor experience. 3. City pays only for its own liability and losses. Disadvantages. 1 . No spreading of risk and losses. 2. A few "bad" cases could put a city in a very tenuous financial position. Staff is continuing to evaluate the option of self-insurance in light of the possibility of issuing certificates of participation in order to fund self-insurance reserves. This could provide the capitalization needed to establish a self-insurance fund. The objectives of the certificates of participation self-insurance option would be to (1 ) insure availability of adequate coverage (2) at a net annual cost which is less than the cost of insurance premiums to third party insurers and (3) limits the City's liability exposure to its own experience. Initial capitalization of the reserve fund may also assist the City in eventually obtaining excess insurance coverage. The ability to achieve the above objectives and, ultimately, the program' s feasibility relative to other alternatives, revolve around several considerations: - The initial sizing of the reserve. - The rate of interest on the certificates. - The reinvestment rate for the certificate proceeds. - Estimate of claims to be paid from the reserve fund. The legal and economic possibility of this option is being further pursued by staff. III. Risk Pooling Arrangement. In response to the state-wide crisis, many groups of cities have entered into self-insurance pooling arrangements to mutually self-insure their risk. Staff is looking at two mechanisms for providing risk pooling. A. California Municipal Insurance Authority (CMIA). B. Joint Powers Authority (JPA) of San Diego County Cities. Page 3, Item 9 Meeting Date 3/18/86 A. California Municipal Insurance Authority. This mechanism is being developed and implemented by the firm of Marsh and McLennan for the purpose of providing primary and catastrophic liability coverage to qualified cities in the State of California. The concept is a risk sharing pool funded through the issuance of certificates of participation. CMIA proposes to offer both primary (for risk of loss up to $1 ,000,000) as well as catastrophic (for risk of loss from $1 ,000,000 to $10,000,000) liability coverage to qualified risks. Primary Coverage. Qualified cities may access the CMIA pool for first dollar coverage or at an approved deductible level from $5,000 to $500,000. Premiums will be determined on an underwriting basis, rather than through arbitrary allocations, and will be subject to retrospective additional premiums as well as refunds, as experience develops. The limit of the primary coverage will be $1 ,000,000 inclusive of all deductibles. Catastrophic Coverage. Qualified cities may purchase excess liability protection to limits of $5,000,000 or $10,000,000, again subject to retrospective assessment and refund. Since the exposure of CMIA in the catastrophic area will be potentially great, the Authority is endeavoring to organize capital investment of no less than $30,000,000 as initial surplus for the protection of pool participants. Premiums. Deposit premiums will be collected annually based upon past experience and existing risk exposures. Retrospective premiums will also be collected based on the loss experience of the insured city and on the loss experience of the entire pool . At any time that losses exceed collected premium, an additional deposit premium will be assessed against each of the insured cities. Advantages to CMIA: 1 . CMIA is a short-term solution to the current crisis, and may be a long term vehicle for stabilization of risk transfer options. 2. Provides a large pool of cities over which to spread liability. 3. CMIA will provide necessary services such as claims management, legal services, actuarial services, and risk analysis. 4. If the private insurance market improves, CMIA might enable participating cities to obtain reinsurance through conventional insurance markets. jte Page 4, Item 9 Meeting Date 3/18/86 Disadvantages to CMIA: 1 . Cities with good experience would pay partially for the losses experienced by other cities. 2. To join the CMIA facilities, a binding three year commitment, renewable annually, will be required. 3. Annual deposit premiums could be quite costly. An estimate of the initial deposit premium will be available from CMIA sometime in the first week of April . 4. The target inception date for CMIA is April 15, 1986 and it may take several more weeks in order to get the program establ i shed. B. Joint Powers Authority - San Diego County Cities. Under this risk pooling arrangement each city in the JPA would contribute to a self-insured accrual account, an amount of money (determined by underwriting formula) to meet the projected cost of risk each year. Member cities of the JPA would be the same cities in San Diego County that are now part of the SDCCRMA including Chula Vista, Coronado, Del Mar, Escondido, La Mesa, Lemon Grove, National City, Oceanside, Santee, and Vista. The JPA would work through a "captive insurance company" which would be established to provide a vehicle for issuing insurance policies to the JPA, issuing certificates of insurance, and provide professional services,such as underwriting, claims administration, brokerage and risk management. The captive insurance company would exist exclusively for the purposes of the JPA. Coverage. Self-insured retentions (SIR) would be maintained by individual cities and range from a minimum of $100,000 to a maximum of $1 ,000,000 depending on risk factors and member ability to insure risk. Coverage would include municipal , general and automobile liability including errors and omissions. Coverage would be in the form of a claims made policy which pays for losses incurred only on claims filed during the year the policy is in effect, regardless of when the damage was actually suffered. (An occurrence policy pays if the damage occurred during the policy year, regardless of when the damage is discovered and a claim filed. ) The coverage limit would be $5,000,000 per occurrence. Pool Funding. Funding of expected claims would be through two sources: (a) annual premiums paid by the member cities, and (b) assessments of member cities. r , Page 5, Item 9 Meeting Date 3/18/86 The annual premiums would be calculated initially based on past loss experience and reasonably assessed through a professional underwriter. Coverage in the form of claims made will allow for accurate assessment of each years exposure to determine future premiums to ensure fund solvency. Assessments would be an available tool in the event loss results are much worse than anticipated or funded. Some type of annual aggregate restriction will be imposed to limit the maximum captive payouts in order to limit assessment potentials. Advantages to JPA: 1 . Provides a vehicle through the captive insurance company for issuance of policies of coverage, certificates of insurance, premium allocations, and setting of proper funding levels. A professional underwriter will be used for allocation of premiums and future assessments. 2. Provides a vehicle to purchase reinsurance or excess insurance on a group basis if and when it is available at a reasonable cost. 3. There would be an annual aggregate restriction on some types of claims for the protection of the pool and other cities. 4. If maintained, this structure would modify the dependency on the insurance market through the "hard" cycle while taking advantage of any "soft" market conditions. 5. Reduces the negative impact of non-insurance on specific entities by spreading risk. 6. The JPA can be implemented in a fairly short period of time. It will take several months to establish the captive insurance company, but in the interim, it is possible to "rent a captive" until the JPA has its own. Disadvantages to JPA: 1 . The City would be part of a pool and would be assuming the risk that other cities might have worse liability experience than Chula Vista. This could result in a city having to pay additional assessments to cover losses in other cities. Conclusion From the above discussion, it is readily apparent that there is no one option that is clearly more advantageous to the City. A major problem is that staff, at this time, does not have enough cost information to do an economic comparison that might more clearly indicate the option to pursue. Page 6, Item 9 Meeting Date 3/18/86 However, because of time constraints in that our current insurance policy expires as of March 31 , staff is recommending that Council approve entering into the risk pooling arrangement with the other San Diego County cities and work through a captive insurance company in order to provide risk coverage. This will prevent the City from having to "go bare" for any period of time. Staff will continue to explore the other possibilities discussed, namely the CMIA and the self-insurance concept, with the idea that the City could change to another option in the future if it proved to be more viable in terms of economics and transfer of risk. FISCAL IMPACT: Staff does not yet have enough information to determine the cost of the various options being considered. Lack of insurance can have tremendous negative fiscal impact on the City if it experiences a few "bad" cases and has large judgements entered against it. One way of lessening this potential impact is to enter into a risk pooling arrangement with other cities in order to spread the liability over a broader base. The downside is, of course, that the City assumes the risks of other cities in the pool and may end up paying for their liability losses. WPC 0337G 1)i r of Chula vi,id Dated t P "f