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CI'<;'OF SAN BERNARDIU - REQUE~ FOR COUNCIL AC'hbN
From: JAMES ROBBINS,
Deputy City Administrator-
Dept: Administrative Services
Subject: BICEP
Date: December 14, 1987
Synopsis of Previous Council action:
November 9, 1987 Presentation to Ways and Means Committee
It was suggested a presentation to the Mayor and Common Council be
made prior to any action being taken.
Recommended motion:
Direct the City Attorney to prepare resolution "authorizing the
execution and delivery of a liability risk coverage agreement and
filing of validation proceedings and certain other actions in
connection therewith" for consideration on January 18, 1988 agenda
of the Mayor and Common Council.
tI~c:o~
CI Signature
Contact person:_
JAMES ROBBINS
Phone:
5122
Supporting data attached:
Ward:
FUNDING REQUIREMENTS:
Amount:
Source: (Acct, No,)
(Acct, Description)
Finance:
Council Notes:
75-0262
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45'
elk OF SAN BERNARD~ - REQUw,. FOR COUNCIL AC-rlON
STAFF REPORT
Executive Summary
Over the past six months, I have been meeting with officials
from other medium and large cities interested in forming a
fully funded self-insured risk sharing Liability Insurance
Pool. The attached report discusses the pool in detail. At
the luncheon on the 21st of December, the following will be
in attendance to discuss the report. ICRMA - Gordon Davis;
Marsh and McLennan - Gary Martin; Brown and Wood - Casanolga;
Kelling, Northcross and Nobriga - Mark Northcross.
This risk sharing fully funded pool would provide the City
with 25 million dollars in liability coverage for approxi-
mately $410-$420,000. It currently is difficult to get
information on 10 million dollars ~n coverage from private
insurance. In years where the payouts do not exceed premiums
paid, refunds of 50% will be made.
The proposed program
possible exceptions
program worth the
Common Council.
is supported by cities involved with the
of Torrance and Pasadena. It is a
support and participation of Mayor and
It is respectfully recommended that the proposed action be
taken.
75-0264
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C I T Y
OF~AN BERNQR
INTEROFFICE MEMORANDUM
8710-1412
DIN 0
TO:
The Honorable Mayor and Common council
FROM:
James Robbins, Deputy
Administrator/Administrative services
City
SUBJECT: BICEP
DATE:
November 4, 1987
(7239)
COPIES:
City Administrator, City Attorney
-------------------------------------------------------------
BACKGROUND
For sometime, staff has advised that the sky rocketing cost
and non-availability of Municipal Liability Insurance has
kept the City in a position of total self-insurance, thereby
continuing its exposure to retaining unlimited liability for
any "Claim for Damage" received.
In May of this year, I received correspondence from the
Independent Cities Risk Management Authority (ICRMA) inviting
us and other large California cities to participate in
discussions relative to forming a second capitalized risk
sharing pool within the ICRMA program. ICRMA is a large
Southern California Joint Powers Authority consisting of 23
cities in Los Angeles and Riverside County.
Working with ICRMA and its team of consultants, we have
shaped an effective program structure, and to date, it
appears to be viable long term liability insurance solution.
This program has already proven effective for the 23 cities
of ICRMA and the 35 counties of the County Supervisors
Association of California Excess Insurance Authority
(CSAC-EIA). It is anticipated that this proposed pool will be
fully operative by July 1, 1988.
The thrust of this report is to provide a program descrip-
tion and to seek an approval in concept for the City's
continued participation. The proposed process is to have
representatives available at the Ways and Means and Legisla-
tive Review Committee meetings in November. The Resolution
approving the plan, in concept, and requesting validation of
the JPA and program would be on a January Council Agenda for
adoption. This resolution would still not bind the City. The
actual JPA formation and bond sale documents, in April or
May, would bind the city.
Mr. Barlow of the City Attorney's Office, who has worked on
.
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INTEROFFICE MEMORANDUM:~8710-1412
BICEP
October 26, 1987
Page 2
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the CSAC-EIA pool, attended one session and has reviewed
legal documents through the various revisions. I have
attended the group meetings and actively participated in the
development of the program, as presented.
DISCUSSION
I. The Proqram
Insurance pooling in California has proven thus far to
be cost effective and administratively efficient. The
ICRMA program contains the advantages of: (1) Risk
sharing and (2) a Funded Liability Reserve, (designed to
create a pool of capital necessary to underwrite a
Comprehensive General Liability limit of $25 million per
occurrence). The program's concept makes sense and has
attracted the participation of the following large
California cities:
Fullerton
Garden Grove
Huntington Beach
Los Angeles
Oakland
Oxnard
Pasadena
Pomona
Riverside
Sacramento
San Bernardino
San Diego
Torrance
All of these cities have populations of over 100,000 and
are homogeneous in their risk exposure. Each city has a
compre-hensive Risk Management program, and will be
pooling virtual-ly all major perils of loss at self
insured retention levels of between one and five million
dollars. The program offers a policy limit of $25
million anQ has the expressed intention of reinsuring
itself when economically feasible to do so.
The Advantaqe of Risk-Sharinq
The ability of a group insurance pool to share risk is
one of the primary benefits of the program. Risk-sharing
by a pool has a number of auxiliary benefits:
1)
Risk-sharing minimized
insurance or self
municipalities.
the fluctuation in cost of
insurance experienced by
2) Risk-sharing allows the members of the Pool to set
the terms and conditions of their insurance cover-
age; and
3) Risk-sharing allows the members of the Pool to
directly control both administrative cost and loss
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INTEROFFICE MEMORANDUM:"""'8710-1412
BICEP
October 26, 1987
Page 3
".._J
adjustment.
The Pool, by achieving a risk-sharing balance, reduces
the burden of catastrophic loss we bear when we self
insure. On the other hand, when we join, the Pool
belong to a group which limits the number and sets the
eligibility standards for its membership. This reduces
our risk of buying conventional insurance from national
firms with no membership requirements or ability to
control losses except through cancellation.
The Advantaqe of Funded Liabilitv Reserves
The funded liability reserve is designed to create an
ability for self-insured cities to fund their Incurred
But Not Reported (IBNR) liabilities over a period of
years thereby reducing General Fund cash flow for this
purposes.
It is also provides a pool of capital
payments which may arrive in early
advantages of this approach include:
to cover loss
years. The
1) A group insurance pool with a funded reserve has
better access to and greater bargaining strength
with the reinsurance market. ICRMA was one of the
first pools to obtain a reinsurance quote.
2) A pool with a funded reserve reduces the cost of
reinsurance because it negotiates directly with the
reinsurer, reducing the costs of intermediaries.
3) A pool with a funded reserve has greater control
over coverage terms and claims adjustment policy
when it purchases reinsurance.
An "unfunded" insurance pool that gradually builds its
reserves over time rather than fully funds from the
outset, faces a potential risk that it will be
underfunded in the initial years and require large
assessments of its members in the case of a catastrophic
loss. This risk is reduced for the fully funded pool.
II. Proqram structure
Incorporating the
Funded Liability
structured in the
principles of Risk-sharing and
Reserve, the proposed program
following manner:
a
is
1)
In order to generate
the program, thereby
from an actuarial and
necessary
making it
insurance
funds to capitalize
financially sound
industry standpoint
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INTEROFFICE MEMORANDUM:~8710-1412
BICEP
October 26, 1987
Page 4
.....,I
the ICRMA Large cities Pool, as a Joint Powers
Authority, would arrange for the sale of bonds as
provided by the state Bond Pooling Act. The size
of the reserve and each member's share is deter-
mined using an actuarily developed risk-sharing
formula.
2) ICRMA would pay all debt service on the bonds
issued by its members to fund the loss payment
reserve. ICRMA pays the debt service primarily
from interest earnings on the reserve and
secondarily from annual premium payments of its
members. Legally, of course, we are liable for the
debt which we incur for this purpose.
3) As the pooled bond proceeds are drawn down to pay
insurance claims, they are replenished from pre-
miums. Over time, funds identified as bond pro
ceeds (therefore, invested at a restricted yield)
are expended and reserves drawn from premiums form
the loss payment pool. These reserves can be
invested at an unrestricted yield which reduces
premiums for Pool members and accelerates the
defeasance of bonded debt. (Please see attached
flow charts.)
For San Bernardino, our annual premium payment to ICRMA would
cover three items:
1) Debt service on Bonds.
2) Administrative Charge The Pool will have the
normal cost of administering its insurance program.
It is expected that our Pool will hire the existing
General Insurance Manager of ICRMA to administer
the pool for its members. The premium will also
cover this expense and it is expected that these
costs will be streamlined since we are accessing an
existing structure.
3) Loss Assumption/Risk Premium Component - The total
for Risk Premium is being determined by a qualified
actuary and is set for the first year prior to the
Bond's closing. This premium calculation will be
undertaken annually, subject to a maximum allowable
increase in anyone year of 10%.
At the end of each year of pool operation, the
actuary will determine a new figure for the maximum
allowable increase. After the third year, any
change qreater than 25% upwards or downwards of a
city's Risk Premium Proportion must be approved by
.
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INTEROFFICE MEMORANDUM:'-'8710-1412
BICEP
October 26, 1987
Page 5
-....,;
an unanimous vote of
any change less than
of the entire Board.
veto power over harsh
the Pool's Governing Board;
25% requires a majority vote
This means that the city has
increases.
Each participating city is responsible for its annual pre-
mium payment. These are secured by an insurance agreement
between the City and ICRMA, pursuant to which ICRMA agrees
to provide liability insurance in exchange for each city's
promise to pay premiums.
settinq Premiums and Risk Sharinq Formula
The premium is used primarily to build up the Pool's own
reserves. We pay our share of debt service as part of our
annual premium payment. Because of earnings on bond pro-
ceeds, actual net debt service requirements for member
municipalities should be comparatively small, and the balance
of the premium payment will be used to establish the Pool's
own loss reserves., Debt services premium percentages always
remain the same. Actual premium levies are adjusted annually
to reflect changes in incurred loss estimates actual losses
paid, and the purchase of reinsurance so that premium levels
remain actuarially sound, and incurred loss reserves remain
at realistic levels.
Premium levies are allocated according to a risk-sharing
formula which reflects a combination of exposure and loss
history, but with protective features to spread incurred
losses among members. Allocations based on loss history will
be based on multi-year moving averages in order to smooth the
shock of any catastrophic losses. Adjustments will take the
form of automatic refunds and would in no way, perma-nently
alter a member's risk allocation or risk premium proportion.
Refunds shall also include interest form the time the reserve
was set up.
For a catastrophic loss, members may draw down reserves from
the capital base provided by bond proceeds, and amortize the
loss. A catastrophic loss liability will be allocated among
members on the same basis as any other major loss. This will
allow members to spread risk among participants and spread
risk over time.
Leavinq the Liabilitv Insurance Pool
We may leave the Pool after an initial 3-year commitment
period by allocating a sufficient amount of our equity in the
bond proceeds and reserves to cover outstanding principal on
the bonds. It is expected that our share of equity in the
program will be proportional to what we have contributed.
.
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INTEROFFICE MEMORANDUM~8710-1412
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October 26, 1987
Page 6
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Withdrawing cities are also responsible for any losses
incurred during the period of their membership in the Pool.
If a city's
the pool's
may have to
withdrawal
actuarial
be set.
from the program fundamentally alters
soundness, then additional conditions
III. Other Conditions
Leqal
The law firm of Brown and Wood, a nationally respected
law firm, very experienced in bond counsel work and
acting as bond counsel to ICRMA, is providing the legal
work for this program. They have successfully put into
operation three Funded Municipal Liability Insurance
Pools in California and one in Montana. They have
rendered the necessary legal opinions and have success
fully validated the issue of the sale of bonds for
insurance purposes in numerous counties in California.
Insurance
The program, which is insurance driven, is designed and
fully supported by Marsh and McLennan, Inc. The Public
Entity Division of Marsh & McLennan's San Francisco
office is ICRMA's Insurance Consultant for the program.
The program's coverage document is very comprehensive
and has been specifically tailored for large California
cities. The coverage is written on an "occurrence" form
which is very desirable. Additionally, very strong Risk
Management and Claims Handling guidelines have been
built into the program so as to ensure the responsible
management of liability from each Member City.
Financial
The financial aspects have been previously discussed in
describing the program structure. The program's finan-
cial advisor is Kelling Northcross and Nobriga who have
successfully worked with Marsh & McLennan and Brown and
Wood in structuring the previously mentioned funded
insurance pools.
IV. Proqram Benefits
1) The primary benefit at this time is no commercial
insurance at this level ($25 million) is available,
and we are desirous of transferring risk if econo-
mically feasible to do so.
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INTEROFFICE MEMORANDUM:~710-1412
BICEP
October 26, 1987
Page 7
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2) Risk-sharing through ICRMA should allow the city to
minimize severe cost fluctuations in the insurance
market place in addition to saving on exorbitant
underwriting and insurance company administration
fees.
3) ICRMA will enable cities to determine coverage
terms and policy conditions as the pool issues the
policies and terms of coverage.
4) The pool will be set up with strict Risk Management
requirements for member cities. However, if a
catastrophic loss occurs, rather than being at the
mercy of an insurance company for increased premium
or cancellation, the risk-sharing principle of the
pool spreads this risk so that the city's financial
viability would not be devastated and it would be
able to amortize its loss over a reasonable period
of time.
5) The use of bond financing for the insurance pool
program will enable us to restructure our own self-
insurance reserves and maintain them significantly
lower levels than if we rely on self-insurance
reserves only.
6) Considering the fact that this is strictly an
excess loss pool, with reasonable expected loss
experience, the pool can become self-amortizing
over a period of ten to twelve years with the City
maintaining proportionate equity at all times.
7) The combination of proceeds and reserves is ex-
pected to exceed outstanding principal at all
times, proving greater security for the bondholders
and thus reducing debt service expense to the City.
8) In the event that reinsurance becomes available in
the future from outside carriers at competitive
rates, the Pool will be in an ideal position to
negotiate directly with the reinsurance industry
and obtain the lowest rates possible for its
members. The proceeds and reserves of the pool can
be then be drawn down to pay debt service, and the
bonds will become self-amortizing.
v. Proqram Risks
As with any program, there are advantages and disadvan-
tages. Naturally, a large claim against one city would,
as is the case in any risk-sharing pool be financed in
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INTEROFFICE MEMORANDUM:~710-1412
BICEP
October 26, 1987
Page 8
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part by the other cities in the pool.
The funding plan has been deemed actuarily sound and
has been loaded to absorb a number of "big-hitting
claims." However, if numerous and staggering losses are
experienced, particularly in the early years, and all
the proceeds are drawn down to pay claims, cities
conceivably could be paying debt service for insurance
coverage which may no longer be available.
It should be noted, however, that numerous checks and
balances have been built into the system making it
extremelv unlikelv for the pool to go bankrupt. If for
no other reason, these mechanisms are sound because the
bond raters in New York are very conservative and in
order to get the necessary sale, the potential investor
must be adequately protected from default.
VI. Fundinq and Sample Loss Scenarios
The attached schedules outline the effect of different
funding and loss scenarios for a single coverage year
and the risk sharing mechanism being considered by the
steering committee of the Big Independent Cities Excess
Pool). The loss scenarios shown are average losses, no
losses and high losses. The average loss scenario
merely reflects losses which are slightly higher than
the amount of pure premium appropriated for the coverage
year and is not based on historical loss experience. The
following is a column by column explanation of the
schedules. The numbers used are from the "average
Losses" page.
AGENCIES: Represents the cities who are currently
considering BICEP and which were included in the
actuarial study. The final group may not include all
the cities listed and/or may include certain cities not
listed.
SIR: (Column I): Represents the selected Self-Insured
Retention (SIR) of each city per occurrence. (San
Bernardino 1,000,000)
PCT: (Column 2): Represents the percentages upon which
Risk Premium Adjustment assessments (Column 9) are
based. The percentages are based on the actuarial
study. In the first three years, these percentages will
be different from each City's percentage of the Total
Pure Premium (Column 3) as a result of the adjustments
to the loss rates for cities with a $1 million SIR in
order to maximize the participation level of the cities.
(San Bernardino 4.58%)
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INTEROFFICE MEMORANDUM:~710-1412
BICEP
October 26, 1987
Page 9
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PURE PREMIUM: (Column 3): Represents each city's Pure
Premium. The amounts are based on the first year's
adjusted rates. (San Bernardino 305,000)
BASIC PREMIUM (Column 4): Represents the estimated
annual net debt service to be paid on the bonds. Basic
Premium is allocation based on the percentages in Column
2. (San Bernardino 1,600,000 x 4.58% = $73,280)
ADMINISTRATIVE PREMIUM (Column 5): Represents the
estimated annual administrative expenses of BICEP.
Administrative Premium is based on each City's
percentage of the Total Pure Premium in Column 3. (San
Bernardino 6,255,000 divided by 305,000 = .04876 x
300,000 = 14,628)
PARTICIPATION PREMIUM: (Column 6): Represents sample
amounts for case reserves for known losses and paid
losses. The amounts are randomlv selected and do not
reflect San Bernardino or any other City's loss history.
TOTAL LOSSES (Column 7): Represents sample amounts for
case reserves for known losses and paid losses. The
amounts are randomlv selected and do not reflect San
Bernardino or any other City's loss history.
COVERED LOSSES: (Column 8): Represents the portion of
the total losses covered by BICEP, assuming the Total
Losses in Column 7 reflect a single loss for each city.
Equal to Column 7 minus Column I.
PURE PREMIUM ADJUSTMENT (Column 9): A positive number
represents an assessment and is equal to (Column 8 Total
minus Column 3 Total) multiplied by the percentage in
Column 2). Assessments are payable in equal
installments over a five year period.
(San Bernardino 6,650,000 - 6,255,000 = 395,000 x 4.58%
= 18,091)
A negative number represents a refund and is equal to
(Column 8 Total minus Column 3 Total) multiplied by each
City's percentage of the Total Pure Premium in Column 3.
Refunds are payable no sooner than three complete years
following the coverage year of when the books for the
coverage year are closed and are subject to minimum
premium levels when paid.
TOTAL PREMIUM (Column 10): Represents the total amount
paid with respect to the subject coverage year and is
equal to Column 6 plus Column 9. The total amount paid
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INTEROFFICE MEMORANDUM: 't710-1412
BICEP
October 26, 1987
Page 10
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would be spread out over time if Risk Premium
Adjustments are included. (San Bernardino 392,908 +
18,091 = 410,999)
VII. Alternatives
There are basically three alternatives:
1) remain as we are "self-insured";
2) attempt to join another pool program;
3) seek commercial coverage; or
4) join this pool program.
Over the years we have been self-insured, the City has
had several cases that have been in excess of the one
million self-insured reserve. Those cases would now be
paid by the pool. If we did not have any more cases of
that size, it could be argued that the money for premium
was unnecessary.
other pools are already in place. Most cities have
joined other cities of similar size and insurance risks.
They are not interested in a City this size joining
unless the loss history is better than the average of
the other cities. Our history and size have caused
other pools to decline our attempts to apply. Most
pools have an entry cost, as this one will, making new
members entry difficult in the first few years of opera-
tion.
We have two applications in the open market. They are
both a maximum of ten million with the same one million
reserve. Both would be one year policies renewable at
the insurance company's option. Second hand information
indicates the premium will be more than is proposed in
this pool for a twenty five (25) million coverage.
The fourth and most viable alternative is to join other
cities in forming this pool. As loss histories are
established, other areas of insurance coverage become
viable for the pool. These typically include property,
health, and workers' compensation. This pool provides
the City with coverage at a reasonable rate. The level
of coverage is beyond reasonable expectation. No city
has taken a loss of the magnitude projected yet the
potential is there and if we can protect against it, we
are fulfilling our responsibilities to the community.
CONCLUSION
This is a very viable, long
liability insurance problems.
term
As a
solution to the
member of the
City's
Under-
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INTEROFFICE MEMORANDUM:~710-1412 -..I
BICEP
October 26, 1987
Page 11
writing committee, I have been personally involved with the
business terms of the program. Although all terms of cover-
age, pooling, and membership were negotiated and voted
democratically among the committee members, I find none of
the terms being totally objectionable to our city.
I believe it to be a good program for the reasons outlined in
this report. To date, 15 cities have applied, and it is
anticipated the pool will become operative with at least 10
participating cities.
cities favorable to this plan are being asked in January to
pass resolutions of conceptual approval of plan including
coverage agreement and intent to participate in insurance of
Bonds.
This matter is being brought before Ways and Means and
Legislative Review. From a financial standpoint, it is
important for Ways and Means and as a policy for the city in
joining other cities, it is important to Legislative review.
t~~
JAMES ROBBINS,
Deputy City Administrator -
Administrative servies
JRjmd
Attachment