HomeMy WebLinkAbout14 - Workers Compensation Excess Insurance RenewalSeptember 10, 2002
Agenda Item 1 4
City of Newport Beach
Human Resources Department
Memorandum
To: Mayor and Members of the City Council
From: Lauren F. Farley, Risk Manager 6P
Subj: Workers Compensation (WC) Excess Insurance Renewal
Recommendation
The City Council approves the renewal of the excess workers compensation
insurance coverage with a self - insured retention (SIR) of $500,000 with the
options in coverage limits and premiums outlined below for FY 02/03.
Appropriate funds exist in the budget (# 6010 — 8638) to cover the expenditure.
Coverage Limits
Attachment A SIR WC & Employers Liability Premium
Cal Surance $500,000 $ 25 million /$1 million $193,952
Option 1 per occurrence for both
coverages
Background
The city purchases excess workers compensation insurance as a risk - financing
tool to protect against catastrophic loss in this area of its benefit obligations. This
coverage has been purchased since September 1, 1995 through our broker, Cal
Surance. Unfortunately, as was the case with the city's excess general liability
renewal, the insurance markets have been very volatile for all local governments
in this year's renewal for excess workers compensation. In fact, some
neighboring agencies in Orange County only received one viable quote for this
coverage. The excess workers compensation markets experienced similar
repercussions as the general liability markets, such as tightening of underwriter
standards, a fixed coverage limit (previous available limits were much broader at
a statutory level), more exclusions of specific types of coverage, paid losses
exceeding earned premium, catastrophic losses in 2001 and loss of investment
income to offset obligations.
Page 2
Also, the passing of AB 749, effective January 2003, increasing benefits to
injured workers by approximately 22% has compounded this market situation.
The League of California Cities along with the state's public risk management
associations are assisting in clean up legislation to lessen the impact of AB 749
on local governments. The private sector is also involved in the clean up
legislation effort.
Renewal Quotation
With this situation in the workers compensation arena, staff accessed several
markets through various brokers for comparable quotes for council review
(Attachment A). In addition, staff asked our actuary, John Alltop, Bickmore Risk
Services, to analyze these quotes against our workers compensation claims
history to determine the impact on the city's workers compensation internal
service fund budget and the ability of that fund to pay for the city's workers
compensation losses in FY 02/03.
In brief, Mr. Alltop's review showed that the majority of the city's claims fall well
within the current SIR of $350,000 and the proposed minimum SIR of $500,000.
Since 1995, the city has only had three (3) claims with a total loss reserve
exceeding $500,000 and two (2) claims with a total loss reserve exceeding
$750,000. This reveals that the city's claims history reflects a trend of
frequency (number of claims) as opposed to severity (total claim amount
paid). Our actuary also stated that the increase in SIR from $350,000 to
$500,000 alone would require the city to add an additional 4.4% in funding to the
workers compensation budget and AB 749 (in its current form) would add
another 4% increase. The two options below reflect the best quotes offered to
the city by the insurance market place providing an additional choice in coverage
limits.
Coverage Limits
Attachment A SIR WC & Employers Liability Premium
Cal Surance $500,000 $ 25 million /$l million $193,952
Option 1 per occurrence for both
coverages
Marsh $500,000 $ 50 million per occurrence/ $199,112
Option 3 $750,000 $ 1 million per occurrence &
(Police /Fire) $ 1 million per aggregate
Page 3
The city averages 126 sworn police and fire claims per calendar year. The
separate SIR for sworn Police & Fire personnel in the Marsh quote effectively
means the city would have to self- insure an additional $250,000 per claim before
receiving reimbursement from the excess workers compensation carrier. Given
the actuarial assessment of the city's claim severity, five (5) claims with loss
reserves exceeding $500,000 per claim since1995, the city could fiscally project
self - insuring at a minimum of another $1,250,000 which exceeds the additional
premium expenditure $5,160 for the higher SIR and coverage limits. Only a
catastrophic event (multiple severe injuries from one single occurrence) would
potentially allow for the access to the full $ 50 million limit and, again, the city
would have to incur an additional $250,000 SIR, per claim.
Based on actuarial review, there does not appear to be the fiscal need for the
higher coverage limits with higher SIR's for swom police and fire employees.
Therefore, with our claims history, claims payout patterns since 1995, the
recommendation by the actuary to minimally increase the funding of the city's
workers compensation insurance fund by 8.4% for the current fiscal year, staff
recommends the Cal Surance - Option 1. The insurance company chosen must
meet or exceed the city's minimum standards for financial strength and solvency
with AM Best Rating of A -, V 11 or greater. All quotes received have met this
requirement.
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