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SR-042286-6NCM:TP:dvm Santa Monica, California Council Meeting 4/22/86 APR 2 2',1(`9'8//6 TO: Mayor and City Council (r~ / ~~ ~ ~C- ~ . 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 - 1 - APR 2 2 19 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 - 2 - 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. - 3 - 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. - 4 - 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. - 5 - 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. - 6 - 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) - 7 - Reference Contract No. 4668 (CCS).