PURPOSE

The purpose of this report is to provide the City Council with information on the insurance program that was put in place for the City of Burbank for Fiscal Year (FY) 2004-2005 and to provide the Council with projections for the FY 2005-06 program.

BACKGROUND

At the beginning of FY 2004-2005 a report was presented to the City Council outlining the insurance program in place for the City of Burbank.  Also discussed in that report were staff�s thoughts regarding future insurance needs of the City.  At that time, the insurance industry was in a transitional state with coverages and the cost of premiums uncertain at best.  Staff advised the Council on some of the possibilities that were being explored in order to provide the insurance coverages needed to protect the City at the most efficient price.  Staff compared the cost of insurance purchased through the City�s broker along with the cost effectiveness of �Pools� � both joint purchase and risk sharing � and finally compared both these options against the cost/risk of some form of self insurance.

Staff felt that this comprehensive approach would give the City the best cost/risk analysis data upon which a final decision could be made regarding the most appropriate direction to base the City�s insurance program on.

ANALYSIS & CONCLUSION

The Management Services Department/Risk Management and Safety Division is responsible for purchasing insurance coverage for all City facilities, operations and employees.  Over the past few years, insurance premiums in general have increased by an average of 30%.  Not only have the premium costs increased, but the deductibles have also increased while the total amount of insurance coverage has decreased. 

It should be remembered that for the past few years the purchasing of insurance coverages has been time consuming and complicated. With each separate coverage, each policy had to be reviewed to establish what limits were being imposed, what coverages were being dropped altogether, what cost was involved in what was being offered and finally what were essential insurable interests as opposed to what was nice to have.  For many years the City purchased full coverage policies that included �special� coverages, i.e.: flood or crime, etc., at no additional cost.  As the market hardened these �give aways� were withdrawn and additional costs were incurred in replacing them.

Exhibit A of this report provides a comparison of the 2003-2004 Schedule of Coverages with the 2004-2005 Schedule.  The Schedule contains headings which describe the pertinent insurance coverages maintained by the City, the insurance company issuing the policy, the dates of coverage, the limits of coverage along with any self insured portion, and the current premiums paid for that coverage.

As a result of Council input from May 2004 and in coordination with the City Management Advisory Committee (MAC), a number of changes were recommended and ultimately implemented for the FY 2004-2005 insurance program.  After reviewing the various options with the City broker and management staff, it was determined that the following changes would be made to the City insurance program:

The City again joined the Authority for California Cities Excess Liability (ACCEL).  This is a risk sharing pool comprised of the following cities:  Anaheim, Santa Monica, Santa Barbara, Visalia, Palo Alto, Bakersfield, Mountain View, Ontario, Monterey, and Santa Cruz. The City was previously a member of this pool from 1986 to 1998.  The pools loss experience during this time period was exceptionally good.  The City�s total premiums paid into the pool were $4,647,776.  In addition the interest income on those deposits totaled $1,875,705.  Retros, the return of premium deposits for all years, after paying all shared claim expenses totaled $5,265,686.  Deductions were not made for the City�s SIR � Self Insured Retention � which was up to $1,000,000 on losses.  Each member of ACCEL has the same $1,000,000 SIR on each of their individual losses before ACCEL monies are accessed.  It is important to note that while the actual premium cost was approximately $10,000 more than the liability insurance coverage purchased in 2003-04, after seven years of membership in the pool, the City will be in a position to again receive retros, should the pool perform well.  Based on past experience (as stated above), staff believes this will be the case and ultimately the retros will fund future insurance costs. 

Another important change to the insurance program was the decision to not purchase earthquake coverage.  The past few years have seen premiums escalate to 10% of total coverage.  Thus a $10,000,000 policy for earthquake insurance would cost $1,000,000 in premiums.  This FY those premiums were expected to rise above the 10% figure as there was limited reinsurance available for this exposure.  Insurers saw the risk as too great.  For the first time the City decided to start the process to self-insure this exposure in-house.  An initial $500,000 was set aside to start an internal fund to specifically cover earthquake damage. An additional $500,000 will be added to this fund in successive years until at least $5,000,000 is set aside.  At that time the goal and purpose of the fund will be re-examined to determine if the fund is sufficient for the City�s needs.  It is possible that the fund will need additional funding, somewhere in the neighborhood of $10,000,000 or more.  Should commercial insurance be available at reasonable rates, the City could self-insure for the first $5,000,000 layer of coverage and purchase a second layer above the $5,000,000 layer which theoretically should be cheaper.  Staff won�t know the answer to these questions until a time certain in the future but this arrangement gives the City the flexibility to provide some level of coverage until that day comes.

Another change is the decision to self-insure the City�s AD & D (Accidental Death and Dismemberment) coverage for all employees and elected officials.  In years prior the City purchased an AD & D policy for Police Safety members only.  This policy had an insured limit of $10,000 for the accidental death of any officer.  The recent loss of a member of Burbank�s Police Department, due to an accidental death, brought to light the inadequacy of this benefit.  It was decided to self fund this coverage giving all employees and elected officials  $50,000 in AD&D coverage by means of establishing a replenishible appropriation of $100,000 in a self-insured account.  Premium savings will be used to offset the initial cost of this funding mechanism.

For several years the workers� compensation premiums have seen double digit increases.  The effects of recent reform efforts have had little impact on the premium side of the business.  Cities and other government agencies, which typically offer full services to the constituents they represent, have so far continued to see premium rates remain stable or even increase in some instances.  This year staff explored other options in an attempt to find similar insurance coverage at more reasonable prices.  It was staff�s recommendation to join a pool, specializing in governmental agencies.  California Public Entity Insurance Authority (CPEIA) is the largest workers� compensation pooling authority in the State.  Its membership is composed of counties, cities, school districts, water districts and other various governmental agencies.  In order to stay within the funds budgeted guidelines staff has maintained its coverage deductible at the catastrophic level of $2,000,000 per incident.  If in future years the premiums drop to more affordable levels then the City could consider dropping the deductible level to a more appropriate level.

The City�s property program remains the same as in past years with very few changes.  Premiums have seen a slight increase but those are not the result of rate increases but rather due to an increase in assessed values and replacement cost.  Additional costs will be incurred when the Magnolia Power Project begins operation in June.

FISCAL IMPACT

The total cost for the 2003-04 insurance program was $2,197,261, and with the changes made to the program for 2004-05, the overall cost was reduced by $395,179.    

Currently staff is in the process of negotiating coverages and premiums for FY 2005-06.  Because most of the coverages expire in July, staff expects to know the final costs in June.

Based upon current circumstances, staff believes that the City�s membership in both ACCEL, for liability coverage, and CPEIA, for workers compensation coverage, should continue and are requesting Council approval to do so.  Premium rates in both of these programs are expected to remain the same as the 2004-05 program. 

While staff believes that the property premium rates will be somewhat static, there will be an overall increase in the premium cost due to the City�s participation in the Magnolia Power Project.  As a joint owner of this power plant, the City will share the cost of insurance with the other five member agencies.

As for the incidental/miscellaneous types of insurance coverages, staff is anticipating no increase in those premiums.

RECOMMENDATION

It is staff�s recommendation that the City Council note and file this report and approve of staff�s participation and continued participation in the Authority for California Cities Excess Liability (ACCEL) and California Public Entity Insurance Authority (CPEIA). 

Respectfully submitted,

Judie Sarquiz

Management Services Director