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Home My WebLink About2004-05-04 City CouncilCity of Palo Alto City Manager’s Report TO:CITY COUNCIL ATTN:FINANCE COMMITTEE FROM:CITY MANAGER DEPARTMENT: HUMAN RESOURCES DATE: SUBJECT: MAY 4, 2004 CMR: 248:04 CITY OF PALO ALTO SELF-INSURANCE AND RISK TRANSFER PROGRAM This is an informational report and no Council action is required. BACKGROUND As recommended by the Finance Committee in 2003, this report summarizes the levels of self-insurance versus the projected insurance premium expense in 2004-05. The City of Palo Alto transfers risk by purchasing various insurance policies as outlined in the Comprehensive Annual Financial Report (Attachment 1). The Finance Committee directed staff to report on the City’s purchase of insurance and how self-insured retentions (SIR) are determined. The SIR level functions similar to a deductible for a personal consumer product such as an automobile liability insurance policy or a homeowners policy. The City pays for any claim losses incurred below the SIR level and the insurance carrier or risk pool pays losses over the SIR amount. Moving to a higher SIR level allows the City to realize premium savings but at the same time increases the City’s exposure to claim costs if the City experiences a high number of claims or an increase in the severity of the claims. There are three areas of coverage where greater risk assumption through higher retentions or deductibles can potentially reduce the City’s cost of insurance: liability, workers’ compensation, and property. DISCUSSION At the beginning of each calendar year, the Risk and Benefits Manager begins reviewing changes in City operations, programs and City property and gathers data that is provided to the City’s risk pool administrator and broker in order to obtain price quotations. CMR: 248:04 Page 1 of 3 Liability Insurance The City is a member of the Authority for California Cities Excess Liability (ACCEL), a joint powers authority (see Attachment 2). Palo Alto is one of ACCEL’s founding members. ACCEL was formed in 1986 during a hard market when insurance was not only costly but difficult to obtain. Participating municipalities pool their resources and share risk. A $1 million SIR is required for each member and is typical for a medium sized city like Palo Alto with similar operations and services. This self-funded program was designed to pool catastrophic losses as a viable alternative to high cost insurance. ACCEL is one of the most successful accredited JPA’s in the state and has provided an excellent return to Palo Alto each year. Between July 1999 and June 2003, ACCEL took advantage of the soft liability insurance marketplace and purchased a three -year liability insurance policy at a lower premium. In 2002, the insurance market hardened; in 2003, the pool experienced a slight increase in premium above the previous year’s rate. This year it may not be cost effective to purchase insurance and ACCEL may be risk-sharing again. Property Insurance Coverage The commercial property insurance market stabilized in 2003 and Palo Alto’s premium decreased compared to 2002. It is expected that there may be a nominal increase in 2004-05 but it will be within budget. Currently the City’s property program deductible for property loss is $25,000, and for fine arts $2500. In the past 10 years, Palo Alto has only experienced one minor property claim. This year the Risk and Benefits Manager will be reviewing premium cost quotes for coverage with a higher deductible to analyze the cost/benefit of assuming additional risk. Excess Workers’ Compensation Insurance Recent changes in the insurance marketplace have resulted in much higher workers’ compensation premiums for many employers. In 1998, the City’s workers’ compensation SIR was changed from $500,000 to $250,000 due to increasing claim costs associated with severe injuries. By reducing the SIR, Palo Alto improved the mix of risk the City was retaining and risk that could be transferred. However, the SIR slowly increased to $500,000 in fiscal 2002-03 due to the unavailability of insurance at a lower retention level. In 2003, the cost for the same coverage at a $500,000 SIR increased by 69%. To lessen the budget impact, the SIR was increased to $750,000. The cost for this coverage was $226,610 or 24% above the premium paid in fiscal 2002-03. In 2004-05, the premium is expected to increase by 54% or $120,936. The Risk Manager will analyze losses and determine the cost/benefit of increasing the SIR to $1 million to partially offset these premium increases. As previously stated, increasing the SIR level will allow the City to realize premium savings but at the same time increase the City’s exposure to claim costs if the City experiences a high number of claims or an increase in the severity of the claims. It is not expected that the City will experience a high number of claims but many of the Fire and Police claims tend to be severe, CMR: 248:04 Page 2 of 3 require surgery and are costly. The Human Resources department is working with City departments to reduce the number of work-related injuries, recognizing that prevention is the best method for reducing claim costs. RESOURCE IMPACT The increase in insurance premiums costs will be partially contained by assuming higher risk and focusing on reducing the number of work-related injuries. Funds for insurance premiums are provided in the 2004-05 proposed budget. POLICY IMPLICATIONS This report does not represent any change to existing policies ENVIRONMENTAL REVIEW This program is not a subject as defined by the California Environmental Quality Act (CEQA) and is not subject to CEQA requirements. ATTACHMENTS Attachment 1: Comprehensive Annual Financial Report, Insurance Coverage Summary Attachment 2: Description of ACCEL JPA PREPARED BY: Sandra T.R. Blanch, Manager Risk and Benefits DEPARTMENT HEAD: LESLIE LOOMIS Director of Human Resources CITY MANAGER APPROVAL: EMILY I~RR~ O-N Assistant City Manager CMR: 248:04 Page 3 of 3 Statistical City of Palo Alto - Insurance Coverage ..................................................... June 30, 2003 ($000) TYPE PROPERTY LOSS Blanket Boiler & Machinery COVERAGE (Deductible)LIMITS COMPANY All real & personal property ($25,000 deductible), Fine Arts (22,500 deductible) All rual & personal property ($50,000 deductible) $248,536,204 CA Public Entity Property Program $500,000 combined limit excluding CA Public Entity power generation facilities Property Program Flood Insurance FINANCIAL LOSS Employee Dishonesty Trustees Errors and Omissions UMBRELLA EXCESS $100,000 combined business interruption All real property 1305 Middlefield Road $500,000 ~ ($1000 deductible) Position bond-faithful performance per 21,000,000 / $4,000,000 x loss (25,000 deductible)21,000,000 per occurrence for City Mgr. & Director of ASD Trustees errors and omissions $19,500,000 City is a member of an insurance pool participating with a number of other California cities ($1,000,000 self- insured retention) $19,500,000 annual aggregate Hartford Fire Insurance Company EXPIRATION DATE 07/01/04 SPECIAL LIABILITY Volunteers Accident Special Events AUTOM OBILE LIABILITY City Manager Vehicle Only Utility Director Vehicle EMPLOYEE BENEFIT Travel Accident EMPLOYEE HEALTH P LAN Each occurrence Medical - Each person / ($25 deductible) Bodily injury Physical Damage (21,000 deductible comp. collision) Physical Damage (S 1,000 deductible comp. Collision) Indemnity, based on salary The City participates in the California Public Employees’ Medical and Health Care Act (PEMHCA) program to provide medical benefits to employees and retirees 07/01/04 04/05104 Fidelity & Deposit 03/22/04 Co. Insurance Company 07/01/04 of Pennsylvania Insurance Company 07/01/04 of Pennsylvania S20,000 American National 01/01/04 Insurance Company $1,000,000 per occurrence General Star 01/01/04 Indemnity Company $1,000,O00 Progressive Com.04/11/04 Vehicle Insurance $1,000,000 Progressive Com.04/11/04 Vehicle Insurance 21,500,000 per accident Life Insurance Co. of 06/01/06 North America WORKERS"City is self-insured for first S750,000 S750,000 per occurrence 07/01/04 COMPENSATION liability EXCESS WORKERS’Pooled Retention S50.000.000 limit per occurrence -CA. Public Entity Ins 07/0]/04 COMPENSATION Workers Comp and Employers Authority. Liability $45.000,000 workers comp per occurrence, excess of pooled retention limit, includes $5,000,000 employers liability excess of 25,000,000 pooled retention, $10,000,000 sublimit for terrorism Reinsured Layer CA. Public Entity Ins 07/01/04 Authority I SOURCE: Sandra Blanch. Human Resources Dept, City of Palo Alto Attachment 1 A. Description of JPA The Authority for California Cities Excess Liability, is a group of medium-size California cities pooling together their catastrophic losses. Member cities first joined together in 1986 when the marketplace was unable to offer cities sufficient insurance coverage. Driver Allian Insurance Services (formerly the Sedgwick Public Entity Group) assisted member cities in the formation of the JPA. ACCEL pools General Liability, Employee Benefit Liability and Public Officials Errors and Omissions losses. Member cities share risk in excess of $1,000,000. ACCEL pools almost every catastrophic loss incurred by its members, thereby eliminating the need for commercial excess insurance protection. Mission Statement We are an affiliation of municipalities joined to protect member resources by stabilizing risk costs and a reliable, economical and beneficial manner while providing members with broad coverage and quality services in risk management and claims management. Program Summary Genaral Liability IncJuding Public Officials E&O and Employee Benefit Liability $1,000,000 ACCEL Pool Limit $1,000,000 $2,000,000 to $22,000,000 * ¯ Higher Limits available ACCEL has a retrospective rating plan whereby all premiums collected, together with related investment income, in excess of pooled losses and loss expenses for each program year will be returned to members beginning five years after the end of a program year. Excess Workers Compensation Joint Purchase through CPEIA- Members pay their own premium. $400,000 to CPEIA Pool Limits 1,000,000 $5,000,000 Options Reinsurance Limits $5,000,000 to $45,000,000 Attachment 2