SR-042286-6NCM:TP:dvm Santa Monica, California
Council Meeting 4/22/86
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TO: Mayor and City Council (r~ /
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FROM: City Staff
SUBJECT: Approval of Participation in Authority for
California Cities Excess Liability
Introduction
This report recommends that the City Manager be authorized to
execute the Joint Powers Agreement between the City of Santa
Monica and the Authority for California Cities Excess Liability.
Background
Presently there is a severe crisis in the insurance marketplace
with respect to liability coverages. This crisis is particularly
acute in the municipal liability insurance area. While a similar
crisis occurred in the middle 1970~s, this recent situation is
considerably more acute. Some of the problems currently
experienced by insurance carriers relate to a decline of interest
rates (lower investment return), poor loss experience, under
reserving of future liabilities, and adverse judicial decisions.
As a result, carriers have both drastically increased premiums,
reduced coverages and coverage limits, and in many cases have
refused to renew a policyholder at any price.
As recently as 1984, the City of Santa Monica was able to
purchase $19.5 million in excess liability insurance over a
$500,000 self-insured retention for a premium of $55,000. In
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1985 the premium increased to $115,000 with a self-insured
retention of $750,000. Upon the expiration of that policy on
December 1, 1985, the City was offered a program which included a
self-insured retention of $1.0 million with excess coverage of
$1.5 million for a premium of $350,000. An additional $2.0
million might have been obtained for an additional premium of
about $150,000. The City elected not to accept this proposal
because of the prohibitive costs in relation to the limited
coverage limits provided. Since December 1, 1985 the City has
been self-funded for its liability exposures.
It is predicted that by July 1, 1986 there will be more than 100
cities without any liability insurance in the State of
California.
There has .been an intense amount of activity in recent months in
the area of self-insurance pooling programs for municipalities in
the State as an alternative financing mechanism to the present
situation facing most California cities. The government code
permits two or more local public entities to enter into a joint
powers agreement to jointly fund such expenditures.
California cities began pooling liability claims under a joint
powers agreement as early as 1978. California's largest cities
stopped buying commercial liability insurance at about that time.
Most cities, however, began self-insuring a modest level of claim
costs, buying insurance coverage for only large claims.
There are two proposed pools available to the City of Santa
Monica at the present time which plan on providing excess
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liability protection. The two pools are the Independent Cities
Risk Management Authority (ICRMA) composed of independent cities
in Los Angeles County and contiguous areas, and the Authority for
California Cities Excess Liability (ACCEL) composed of larger
cities throughout the State.
ICRMA is a Joint Powers Authority started in 1980. The Authority
currently provides a group purchase insurance arrangement for
approximately 12 cities in meeting their property and liability
insurance needs. With a liability policy expiration date of May
20, 1986 and the lack of a viable insurance market, ICRMA is
preparing to create and capitalize a self-funded excess liability
insurance pool. Approximately 30 cities have expressed interest
in this proposal. The pool will provide optional self-insured
retention levels of $1.0 million, $500,000, $250,000, and
$100,000. Pool coverage over the retention levels will be
provided on a risk sharing basis. Pool losses in these layers
will be shared according to a loss sharing formula based on
experience. Cities will not share losses below their selected
retention levels. In order to provide this coverage, the
Authority will be capitalized through the sale of bonds called
Certificates of Participation. A deposit premium of $281,199
would be required from Santa Monica for the first year. Coverage
would commence on May 20, 1986. The deposit is based on exposure
data, a standard rating formula, and prior loss experience. A
minimum three year commitment is required. The ultimate cost
will depend on the City's loss experience as well as that of the
pool's.
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ACCEL is a proposed Joint Powers Authority resulting from a
meeting of Risk Managers and others in San Diego in February
1986. A study group was formed that worked with an actuary and
risk management consultant to develop a proposed JPA to provide
excess liability protection. This pool also plans to provide
excess liability protection of $9.0 million excess of a $1.0
million retention. An optional risk-sharing layer of $500,000 to
$1.0 million is available. ACCEL will provide coverage to its
members retroactive to April 1, 1986. Proposed member cities
include the following:
1) Santa Barbara 6) Santa Monica
2) Bakersfield 7) Ontario
3) Pomona 8) Pasadena
4) Fresno 9) Oxnard
5) Palo Alto 10) Modesto
11) Visalia
ACCEL will collect a deposit from each member for each program
year (fiscal year) in which the member agency participates. The
deposits will provide funds to pay claims if necessary. All
deposits will be credited with investment income earned on JPA
investments. The deposits are not premiums and will not
determine member's actual costs. Initial deposits are based on
each city's payroll. Administrative costs (for JPA operation)
will be approximately $5,000 annually. Santa Monica's deposit
for next fiscal year would be approximately $517,212. The
balance for this year would be $129,303.
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Beginning 5 years after the end of the Program Year, deposits
would be adjusted based on the loss experience of the individual
city and the pool. The cost allocation calculation will be done
each year thereafter until all claims are closed. This pool
would also require a three year commitment.
Analysis
The advantages of pooling over our current self-funded situation
is as follows:
1) Provides excess catastrophic liability protection.
2) Reduces the need for commercial insurance in the
future.
3) Provides for stablizing the costs of liability
coverage.
4) Spreads risk over time so that no one city alone will
face the consequences of unpredictable losses.
Staff believes the ACCEL program offers the following advantages
over ICRMA:
1) Generally involves larger cities and has a mandated
requirement that each has a risk management department
and program.
2) Will provide coverage for Fixed Route Transit, not
currently being provided by ICRMA.
3) The City has played a major role in the development of
this proposed pool and will continue to play a key role
if formed.
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4) Pool costs for each city are heavily experience rated,
providing an incentive to control losses.
While ICRMA has a lower deposit requirement, it should be
recognized that it will not provide coverage for the City bus
system and will issue bonds to develop a fund source which allows
them to lower initial deposit requirements.
The proposal by ICRMA to issue bonds, poses some legal questions
which are not resolved at this time. Is their sale permissable,
and will their tax-free status be challenged?
ACCEL will provide coverage for the City, as well as any and all
commissions, agencies, districts, authorities, boards or similar
entities coming under the City's direction or control.
Copies of the Financial Plan, by-laws, and coverage memorandum,
are available for review in the Council office.
Financial Analysis
The Comprehensive Self Insurance Fund (#56-700-232-000-204)
currently has $16,550 available to be used for a deposit. An
appropriation increase of $91,203 will be required at this time.
Appropriations are sufficient to meet the balance of the deposit
requirement in the amount of $21,550 from the Bus Self Insurance
Fund (#57-700-233-000-204). Funds for future years will be
budgeted as appropriate.
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Recommendation
It is recommended that the City Council:
1. Authorize the City Manager to execute the Joint Powers
Agreement with the Authority for Cities Excess Liability.
2. Approve the City Council Resolution as submitted.
3. Authorize an appropriation increase of $91,203 for this
year in the Comprehensive Self Insurance Fund
(#56-700-232-000-204).
PREPARED BY: Tom Phillips
Risk Manager
Attachments
(ACCELI)
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Reference Contract
No. 4668 (CCS).