HomeMy WebLinkAbout06. Receive supplemental information on reducing liability self-insurance retention from $1 million to $500,00006
Central Contra Costa Sanitary District
May 4, 2015
TO: ADMINISTRATION COMMITTEE
VIA: ROGER S. BAILEY, GENERAL MANAGER 4
FROM: DAVID HEATH, DIRECTOR OF ADMINISTRATION
SUBJECT: SELF INSURANCE RETENTION (SIR) — LIABILITY INSURANCE
At the November 17, 2014 Board workshop the District Board agreed with staff's
recommendation to lower the District's liability insurance SIR from $1 million to
$500,000. At the most recent Administrative Committee meeting on April 20, 2015
Board President McGill expressed a desire to re- examine the SIR level. Attached is a
white paper which provides additional information to assist in evaluating the issue.
Staff is seeking direction from the committee before submitting a final Fiscal Reserve
Policy to the full Board for approval.
CENTRAL CONTRA COSTA SANITARY DISTRICT
WHITE PAPER
SELF - INSURANCE FUND RESERVES
2015 -16
The District has self- insured most of its liability and some of its property risks
since July 1, 1986, when the Board approved the establishment of the Self -
Insurance Fund (SIF). The SIF has effectively funded District losses since then.
In 1994 Government Accounting Standards Board Statement No. 10 (GASB -10)
set forth requirements on how public agencies must fund their self- insured risks.
To assure compliance with GASB -10, the District restructured the SIF into three
sub -funds to address specific risks and expenses.
Self- Insurance Fund Structure
Sub -fund A - GASB -10 Actuarially -based risks. Sub -fund A is used to pay claims
and expenses that are covered above the District's $1,000,000 retained limit by
an excess insurance policy. That policy covers losses above the retained limit up
to $15,000,000 per occurrence and in the aggregate. For the last several years
the District has maintained this fund with a $1,000,000 reserve.
Assuming average claims experience, this fund pays between five and fifteen
liability claims per fiscal year. If the cost of just one of those claims met or
exceeded District's $1,000,000 retained limit, the entire reserve would be
insufficient to cover the cost of a single year's claims. The District is now in this
very situation; paying for both normal claims experience and one claim up to the
full $1,000,000 retention.
Sub -fund B - GASB -10 Non - actuarially -based risks. Sub -fund B is used to pay
claims and expenses for liability losses that cannot be actuarially evaluated
and /or are not covered by the excess liability insurance policy. This includes
employment practices claims and pollution claims.
Employment practices and pollution claims are usually high dollar claims and
take longer to resolve. Even in low -value claims, these cases can generate very
high investigative and defense costs. Since these two factors make accurate
loss forecasting difficult, an actuarial study is not required for these risks.
Additionally, as of 1986, all general liability insurance policies exclude coverage
for pollution losses. Given the low frequency, high severity and absence of
insurance coverage for the highest exposure claims, the District has maintained
this fund with a $2.4 million reserve.
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Sub -fund C - Non - GASB -10 risks. Sub -fund C is used to pay for other risk
management expenses (insurance premiums, actuarial studies etc.) and self -
insured property losses. The District maintains a $250,000 per occurrence
retention on its property insurance policy. As a result, this fund has maintained a
reserve of no less than $500,000 in addition to it's projected annual expenses.
This fund's reserves have also been used to offset increases in insurance
premiums or claims costs in the other sub -funds and to maintain sub -Fund A's
GASB 10 required minimum reserve level.
Annual Funding - The Operations and Maintenance Fund (O &M) supports the
SIF with annual transfers into sub -fund C which then redistributes funds to sub -
funds A and B to meet GASB and reserve requirements.
Survey of Other Agencies' Insurance Reserving Policies
In August 2014 staff surveyed other water and wastewater agencies in the area
about their overall reserving policies and practices. The following table illustrates
the findings on similarly sized or situated agencies' self- insurance retentions and
reserves.
Agency
Retention
Reserves
Union San
$500,000
3x $1.5 million
CCWD
$500,000
5x $2.5 million
Delta Diablo
$100,000
None — paid from O &M
DSRSD
None
Low deductible paid from O &M
Napa San
None
Low deductible paid from O &M
No other similarly sized agency had a self- insured retention greater than
$500,000. As shown above, three agencies have lower or no retentions and do
not reserve to pay claims at all. Of the two that have $500,000 retentions, Union
San has the lowest reserve funding policy of three times the cost of a single fully -
retained loss.
This approach follows risk financing best practice which recommends
maintaining a reserve sufficient to pay for at least three fully retained losses.
With the District's $1,000,000 retained limit, this would equate to a reserve of
$3,000,000.
Board Reserve Policy and FY 15 -16 Changes to SIF Funds and Reserves
At the November 17, 2014 special meeting, the Board chose to reduce the
District's self- insured retention from $1,000,000 to $500,000 and to maintain
reserves for liability claims covered by the excess policy at three times a fully
retained loss. Effective July 1, 2015, sub -fund A will maintain a reserve balance
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of $1,500,000. Claims and expenses will be paid from this reserve during the
fiscal year. The O &M contribution for the next fiscal year will be used to return
the fund to its minimum reserve of $1,500,000.
At that same meeting, the Board chose to simplify reserving for all risks that do
not require GASB 10 compliance by consolidating other liability claim reserves
and property loss reserves into a single fund. The Board also wanted to make
sure that some resources were reserved for catastrophic or emergency
response. In order to meet the joint goals of consolidating reserves and
establishing a catastrophic loss fund, sub -fund B will now maintain a reserve
balance of $5 million.
As with sub -fund A, payments made from this fund will draw down that reserve
balance over each fiscal year. O &M allocations from the next fiscal year will be
used to return the funds to their minimum reserve balances.
Since the property loss reserves are now included in sub -fund B, sub -fund C will
only serve as a cash flow account, used to pay risk management expenses and
to transfer money to the two reserve funds.
These reserve changes are summarized below:
Fund
Old Role
New Role
Old Reserve
New Reserve
A
Reserve for GASB
Reserve for
$1 million
$1.5 million
10 Risks
GASB 10 Risks
B
Reserve for Other
Reserve for all
$2.4 million
$5 million
Liability Risks
other risks and
Catastrophic
Losses
r—C
Property Losses
j Cash Flow
j $500,000
j 0
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