ABAG PLAN Corp. Strategic Planning Meeting October 8, 2003 Dublin, CA.

transcript

ABAG PLAN Corp.Strategic Planning

MeetingOctober 8, 2003

Dublin, CA

Planning Meeting Goals

Review & Renew our Mission Agree on future characteristics of the poolClear idea of what members want to

achieveEstablish benchmarks for determining

success

AGENDA

Where are we now? Progress Since Last Meeting Issues Remaining

Where are we going? Five-Year Plan Next 2-5 years

Issues For Today

Digest remaining issues from last meetingMOC and Doc Review/Discussion Review current financial condition & ratios Plan for funding beyond goal of $10 mil in

SIR FundAssess WOTS Revise objectives

ABAG PLAN Mission Statement

The purpose of the PLAN is to benefit the citizens of each Member Entity by establishing a stable, cost-effective self-insurance, risk sharing and risk management program for each Member Entity.

Strategic Planning Five Year Plan

2000-01: Admin & Internal Procedures

Outsourcing personnel/equip.

Claims Procedures RiskMaster Web site revamp

2001-02: Funding Procedures

SIR Fund growth No dividend Funding Policy Actuary change

2003-04: Governing Documents & Procedures

Committee Roles MOC Issues Claim Policy

2004-05: U/W & Risk Control Standards

RM Assessment Model Policies RM Funding Incentives/Penalties

2005-06: Long-term Funding Objectives

Growth? Nirvana? Dividends? Expand Coverage?

2006-07: Evolution Response to change Customize to member Start over with 3-5

year review cycle

2007 + Where do Members want to be?

Planning Meeting Goals & Progress 9 Goals Identified

Update Strategic Plan Annually - we’re here! Draft revisions to MOC - today Define Committee Roles - today Continue to evaluate Funding Policy - today Implement loss control approach - begun Reward or penalize members for participation or policies - TBD Get alternates involved - begun Become Accredited? TBD Staffing Plan - Continue to Update

Goals Completed by Next Board Meeting

Document Review & Revision MOC & Bylaws Claim Policy Funding Policy

Implement Loss Control Approach Risk Management Assessment - update Risk Control Policies - Committee Role

• Expectations

• Enforcement

Issues For Next Board Meeting

SIR Increase SIR to $10 mil? Purchase excess insurance?

• Aggregate stop-loss?

• Re-insurance?

• Increase limit? SIR Fund contribution & target ratios Future funding goals and benchmarks

Issues for Future Board Meetings

Extent of Support for Risk Management Programs & Risk Control Policies Risk Management Assessment progress Required & recommended policies & programs To what extent do we mandate policies and

how do we enforce? Funding commitment Expand current offerings

Issues for Future Board Meetings

Long-term Funding and Stability Growth of SIR Fund Net Expense/Nirvana Proactive v. reactive risk control Customizing to each member Target funding to member need Role of excess or reinsurance

Item 5. Document ReviewGoals

Memorialize current practices & understandingAgree on future characteristics and practices of

the poolClear idea of what members want to achieve

Memorandum of Coverage Bylaws Claim Policy

Item 5. Document ReviewBylaws

Committee Roles and Responsibilities Risk Control & Underwriting Committee

• Police

• Public Works? Actuary Committee Claims Committee Finance Committee? Executive Committee

Clean up items

Item 5. Document Review Claim Policy

Objectives Maintain sufficient resources to manage claims Provide experienced legal counsel to defend

covered claims Resolve disputes in a fair and cost-effective manner

Authority LevelsReporting RequirementsPerformance Standards

Claims Management Claims Examiner designated for each Member Claims Liaison designated by Member Tailor claims management program Commitment to training Audit at least every two years

Defense Counsel List Maintained by Claims Committee Must use for covered claims Litigation Management Guidelines apply

Coverage Determination Risk Manager/Coverage Counsel Appeal Process: Claims - Exec - Board Beyond that?

Settlement Authority Member = PD only up to 10% of Deductible Claims Manager = $50k > Ded. & Defense Risk Manager = $100k > Ded. & Defense Claims Committee = > $100k & Ded. & Def.

Reporting Requirements To/From Member and Committee

Program Performance/Audit Standards

Item 5. Document ReviewMemorandum of Coverage

Objectives Address new risks and coverage changes Solicit member input and intent Condense & simplify language Align language with understanding & practice Inform members of coverage nuances and gap

analysis of excess coverage

Covered Parties Deal with auto - permissive use Include PLAN & Board? Duty to defend/indemnify when member can’t

• Exclude parties due to intentional tort or conflict of interest, per G.C. 815.3, 825.6, 995, 996.6?

MOC Declarations Include Additional Covered Entities (v. End.?) Limit = $5 Mil per Loss

Excess Declarations Named Insured Includes ABAG PLAN Corp. Limit = $5 Mil per Occurrence, Wrongful Act, or

Employee Benefit Wrongful Act. Aggregate $5 Mil Limit: Prod./Ops., E&O,

Employee Benefit Liability

Definitions (xs pp. 3-12) BOLD throughout in revised MOC Add “Damages”? Dam - def. & excl. in excess is broader BI include ED? xs does PI - xs includes AI, wrongful eviction & assault and

battery but restricts civil rights to privacy. MOC PI limited to emotional distress.

Pollutants - ag. & stormwater? XS excl. sewer Ultimate Net Loss - revise/ERISA, etc.

Who is An Insured? (XS pp. 13-14) A.-C. Similar to MOC, but includes ABAG

PLAN & its Board D. Any & all JPAs representing any named

insured. Broader than MOC. Section E. for auto exposure - add to MOC? MOC adds “others” via contract ops/facilities

Insuring Agreements (p. 1) MOC has 4 - PD, BI, PI, E&O XS has 3: PD/BI, E&O, EBL EBL = E&O in the administration (counseling,

handling records, enrolling or terminating participants) of the program

• MOC much broader? (p. 31 excl. n.) Reference to “insured contract” in XS PD/BI

• MOC covers via def. of Covered Parties• Subject of additional insured endorsements

Exclusions - condense to one set Failure to comply with terms of grant,

subvention, or other benefit (ex - block grants) Money damages based on failure to comply with

any regulation, law, etc.? Inverse - combine in to one and add exception

• include failure to maintain• see XS policy and practice• Exclude diminution of value.

Exclusions - continued Pollution - add sudden & accidental exception?

• see XS but also def. of pollution• group purchase? see quote in handout

Hospital/Airport - add clinics, etc. XS does Transit Service - shuttle OK? Medical Services

• Beyond EMT? Mgmt.? Police? Ambulance Watercraft - define & add excl.

Exclusions - continued Employment Practices Liability

• Excluded in MOC, covered in excess policy• Cover vicarious liability of employer?

Employee Benefit Plans• Exclude all? Revise ERISA excl. in def. of UNL • Only for unlawful discrimination? (MOC ex.)• Excess covers Employee Benefit E&O

– excludes ERISA– excludes insufficiency of funds (u.)

Exclusions - continued Bidding/contracting: add project mgmt.? Terrorism - excluded by excess insurance Land Subsidence - excluded by xs Mold ? Asbestos? Financial Instruments/Investments Montrose - continuous/stacking exposure

Defense Maintain duty to defend (v. right only) Delete reference to 2860, keep Cumis obligations

and responsibilities Apportionment of fees, covered & not?

Conditions Prevent stacking, progressive PD, EQ, storm Not “Other” Insurance Process for resolving disputes (xs binding arb.)

Process for resolving disputes - goal Prevent a judge or jury from interpreting

coverage in a manner that is inconsistent with the intent of the Members or that threatens the financial viability of the pool.

Who should have the final say?

How will MOC be interpreted? MOC is not insurance Rely on intent of the parties Rely on case law to what extent?

How will disputes be resolved? Intersection with Claim Policy Board decision final? XS has binding 3-person arbitration

This Memorandum of Coverage does not provide insurance, but instead provides for pooled risk sharing. This Memorandum shall be applied according to the principles of contract law, giving full effect to the intent of the Members, acting through the Board of Directors, in adopting this Memorandum of Coverage. However, coverage decisions involving the interpretation of language within this Memorandum that is similar to standard commercial general liability insurance will be based, where applicable, on California case law interpreting such liability insurance contract language.

Review & Discussion of Suggested Topics & Changes

MOCBylawsClaim PolicyOther

Item 7. Management of Retained Funds

Current Financial Condition Funding Policy & Benchmarks

Balance Sheet ComparisonAssets 02-03 01-02 ChangeCash and Cash Equivalents 7,480,841$ 13,393,794$ ($5,912,953)Investment at Fair Market Value 31,692,946 23,293,550 $8,399,396Accounts Receivable 600,662 660,914 ($60,253)Equipment, Net 226,227 278,253 ($52,026)

TOTAL: 40,000,676$ 37,626,512$ $2,374,164

LiabilitiesClaims Reserves 11,629,914$ 15,862,532$ ($4,232,618)Other Payable 176,711 151,970 $24,741Retained Earnings 28,194,051 21,612,010 $6,582,041

TOTAL: 40,000,676$ 37,626,512$ $2,374,164

Income Statement Comparison Revenue 01-02 02-03 03-04 Change Funding from members 02-03 Administrative 1,500,001$ 1,534,233$ 1,800,000$ 265,767$ Liability Program 3,986,239 4,689,641 4,500,000$ (189,641)$ Property Program 516,423 829,308 816,527$ (12,781)$ Investment Income 1,844,336 1,683,202 1,650,000$ * (33,202)$ TOTAL REVENUE 7,846,999$ 8,736,384$ 8,766,527$ * 30,143$

Expenses Property Insurance 347,012 695,067 658,527$ (36,540)$ Depreciation 61,834 61,834 61,834 -$ Management and Administrative 1,295,276 1,516,478 1,870,000$ 353,522$ GL & Crime Insurance 263,979 369,776 436,500$ 66,724$ Contract Services & Other 285,649 262,720 120,000$ * (142,720)$ Provision for Claims and AE 1,602,817$ (977,780) 1,500,000$ * 2,477,780$ TOTAL EXPENSES 3,856,567$ 1,928,095$ 4,646,861$ * 2,718,766$

Retained Earnings 3,990,432$ 6,808,289$ 4,119,666$ * (2,688,623)$

* estimate

Program Funding as of 6/30/03

Liability Program - $37.6 Mil Assets $11.2 Mil Total Liabilities (50% CL) $25.7 Mil Retained Earnings Over deductible paid = $3.25 Mil

Property Program - $2 Mil Assets $157,500 Total Liabilities $1,925,725 Retained Earnings Over deductible paid = $232,707

Liability PoolBreakdown of Liabilities & Fund Balances

Case Reserves

$9,817,458 IBNR Reserves, undiscounted

$6,229,000 Risk Margin Fund

$19,557,650 Self-Insured Retention (SIR)

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

$35,000,000

$40,000,000

Liability Breakdown at June 30, 2003

Total Assets at June 30, 2003 = $37,609,064

$37,259,064

$17,473,000Liabiities, Discounted

90% CL

$11,244,000

$1,654,956

Reserve

Fund Balance$25,786,650

Liabilities, Discounted Expected Basis - 50%CL

$11,244,000

Loss Prevention Fund$350,000

What is Adequate Amount of Retained Funds?

“It Depends” (See WA State Review Criteria)

Aversion to Risk Ability to Assess Large Loss Probability Strategic Goals Changes in SIR, coverage, reserving, actuary

Leverage Ratios

Funding PolicyBenchmarks*

Financial Ratio Numbers: Net Deposits = $4.0 MilTotal Liabilities = $11.2 MilTotal Fund = $25.7 Mil SIR = $5 MilSIR Fund = $19.5

* Including standards used by WA State and MI Municipal Insurance League (MML) - see handout

Funding PolicyBenchmarks

Yearly Deposit at least 50% CL Goal = 70%. Current Funding at 50%.

Total Fund to SIR ratio at least 2:1 Goal = 3:1. Current = 5:1

Maintain SIR Fund = PLAN SIR Goal = $10 Million. Current = $19.5 Mil

Maintain Risk Margin Fund at 90% CL Current = $17.4 Mil. Total Assets = $37.6 Mil.

Total Fund to SIRMeasures Conservatism in Self Funding - maximum

Fund would decrease from one loss. Pools typically at 5:1 to 15:1. A larger SIR would merit

a ratio of 3.0 to 1.0 (WA State Guide). MML benchmark = 10 or more, current = 36.8:1

PLAN ratio is 5:1 ($25:$5 Mil) Exceeds Funding Policy Goal of 3:1 , Min. = 2:1 Up from 3.8:1 last year

Raise goal from 3:1 to current 5:1 and minimum from 2:1 to 3:1

Yearly Deposit to Total FundMeasures exposure to pricing errors. If PLAN

underprices loss funding subsequent poor loss experience would impact Fund. Also measures growth potential supported by Fund

A low ratio is desirable - i.e. less than 1:1 New Pool 5:1; Mature Pool .5:1 (WA Guide) MML benchmark: 1.0 or less, current .79:1

PLAN ratio is .16:1 (4:25.7) No benchmark in Funding Policy Keep at .25:1 or less

Loss Reserves to Total Fund

Measures the potential impact on solvency of under reserved losses. The higher the ratio the more critical reserves be accurate.

Pools typically at 0.4:1 to 2.5:1Low ratio desirable, < 1.5:1 (WA), < 3:1

(MML with current ratio 2:1)PLAN ratio is .44:1 ($11.2:$25.7) Add benchmark: minimum 1.5:1 or less, goal

of 1:1 or less.

SIR Fund to SIR

Unique to PLANMinimum Ratio = 1:1Goal $10 mil - current = $19.5 milCurrent Ratio = 19.5:5 = 3.9:1Up from 9.6:5 = 1.92 Raise minimum from 1:1 to 2:1 with goal of

3:1 (current = 3.9:1)

Change in Fund, Reservesor Funding

Fund: More than 10% reduction merits a study of rate or funding levels. $19.3 to $25.7 Mil change = 32% Increase

Reserves: No more than a 25% increase in prior year’s loss reserves $15.8 to $11.2 Mil change = 29% Decrease

Funding: No more than 10% Increase PLAN funding increase = 0.6%

Funding Goal = 70% CL

Currently at 50% CL Raise to 70% for 2003-04?Would add $660,000 or 16% to Current

Funding ($4,720,000 v. $4,060,000)

Options? Increase Funding Leverage Retained Funds? Lower SIR?

Suggested Funding Benchmarks Fund to SIR - raise goal from 3:1 to current

5:1 and minimum from 2:1 to 3:1 SIR Fund to SIR - raise minimum from 1:1

to 2:1 with goal of 3:1 (current = 3.9:1)Loss Reserves to Fund - add benchmark

minimum 1.5:1 or less, goal of 1:1 or less. (current = .44:1)

Others? Limit Deposit to 10% increase?

Evolution of PLAN Funding1986 - 1990: Growth of Risk Margin Fund1991 - 1996: Dividends Declared1997 - 1998: $3.4 mil Dividend, SIR Fund Created and

Net Expense = $196,000 1998 - 2001: Increased SIR, Loss Funding, & SIR Fund,

Decreased Dividends 2001- 2003: Decreased SIR, XS Ins., SIR Fund Growth:

no dividend, actuary change. 2003 & Beyond: SIR Fund Higher? Dividends?

Leverage? Nirvana?

Pool Nirvana

Assets & Interest >= Deposits + AdminNo new funds are EVER required Is that a realistic goal? Should it be a goal of the PLAN?Great way to view dividends, interest, and

funding from a strategic standpoint.Measure of opportunity cost

Pool NirvanaIs it Realistic?

Other Pools Achieved?Under what conditions?How has the PLAN compared?Could we achieve it now?

Pool Nirvana PLAN Results

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

91 92 93 94 95 96 97 98 99 '00 '01 '02 '03

DepositsDividendsInterestAdmin

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

91 92 93 94 95 96

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

97 98 99 '00 '01 '02 '03

Pool Nirvana PLAN Net Expense

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

91 92 93 94 95 96 97 98 99 '00 '01 '02 '03

ExpenseIncomeNet Expense

Pool NirvanaWithout SIR Fund

($6,000)

($4,000)

($2,000)

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03

Expense

Income

Net Expense

** 03 New Actuary

Net ExpenseSIR Fund Comparison

($6,000)

($4,000)

($2,000)

$2,000

$4,000

$6,000

97-98 98-99 99-00 00-01 '01-02 '02'03

With SIRNo SIR

Pool NirvanaShould It Be a Goal?

Other Uses of Funds Dividends Reduce Funding Increase SIR Increase Occurrence Limit New Programs or Coverages Increase Services - esp.. Risk Control

Pool NirvanaShould It Be a Goal?

How would that change our current goals and practices? SIR Fund = $10 mil + ? SIR = $10 mil? Dividends? Funding Credits

Pool NirvanaReality

Interest Rate and Loss Probabilities make it unpredictable

Possible By-product of Overall Funding Strategy

Is a goal in the sense it reflects pool stability and efficiency

Good tool in measuring funding options and strategic objectives

Pool NirvanaReality

Dividends used to make deposits more predictable

Help ease impact of budget fluctuationsFund more services for members Deposits above or below “predictable” level

(@ = payroll increase) should be based on member’s compliance with loss prevention policies and preventable losses

Item 8. Review, WOTS & Objectives

Trends & Market ConditionsReview of prior meetingsWeaknessesOpportunitiesThreatsStrengthsObjectives

Trends and Funding Issues

Insurance Market Flattening? Coverage terms stabilizing Funding goal is to increase to 70% CL PLAN Document & Coverage Review Liability of PEs increasing

Inverse, pursuit, attorney fees State budget & government by special interest

Future TrendsInterest Rates

Still at record lowsUsing 4.0% vs. 4.5% last year (5% prior)

0.5% drop increased funding @ $40,000 and “increased” outstanding liabilities

No immediate pressure to increasePossible DeflationAny Estimates?

Future Trends

Your Budgets?Your Concerns?

WOTS Analysis

WeaknessesOpportunitiesThreatsStrengths

Prior Planning Meetings

Strengths & Benefits Good Business Practices - Board, Staff & Members Financially Sound Members in Control & Act in Unison Commitment to Training Lower Premiums/stable pricing Equity Distribution Risk Management Staff Responsiveness Training commitment Web site - docs available Proactive response to claim “incidents” Good mix of active Board members

Prior Planning MeetingsWeaknesses & Threats

* Complacency & lack of flexibility in responding to change * Lack of some member involvement/connection* Short-term vs. long-term thinking (i.e. equity expectations)* Pressure to reduce costs* Bad Loss Trends - large loss(es) impact on equity/surplus* Bring SIR in balance with Fund* Give up dividends?* How decide if need excess insurance?* How to respond to multiple losses?* Keep up on new member risks (mold)* Reactive v. proactive training* Loss of member staff talent, esp.. in police, due to PERS 3% at 50 retirement* Economy - member revenue down, PLAN interest income lower.

Prior Planning MeetingsWeaknesses & Threats

Members have no full-time risk manager No authoritarian presence Board member succession planning No model set of risk management policies No monitoring or re-assessment of risk management profile Protection of asset base Per occurrence limit enough? Fraud, including electronic fraud Litigation status communication Longer statute (2 yrs) for civil rights claims and limit time to file MSJ Insurance market continued hardening Diversity of member risks makes it more difficult to address needs Lack of health insurance leads to more pressure to file claims Uninsured employees leads to Work Comp pressure

Prior Planning MeetingsOpportunities & Objectives

Sharing good ideas & “Best Practices” Growth of pool Pool Nirvana Pay dividend again Workload/staffing balance – keep services up. Emphasize training Re-define Committee roles Limit attorney rotation? Improve communication between claims examiners and citizens Risk Management Programs (like sewer program) lead to better ID of

where money is spent and lead to more money to fix.

Prior Planning Meetings

Opportunities & Objectives More On-Site Visits & Recommendations Better Explanation of Formulas, Budgets, Services Better Claim Reports - Graphs, Trends, etc. Training in the Field Fund Loss Prevention Program, including model practices and

audit Share knowledge & resources of staff and other members Pay for Board member training Scholarship fund for education in risk mgmt

Earthquake exposure identified

2003 Strengths

2003 Weaknesses

2003 Threats

2003 Opportunities

2003 Board Goals & Objectives

9. Other BusinessComments?Questions?

THANK YOU!