JUNE 8, 2004

SUBJECT: RENEWAL OF EXCESS WORKERS’ COMPENSATION POLICY 2004/05

REPORT IN BRIEF

The purpose of this report is to recommend Council approval of the purchase of the City's excess workers' compensation insurance which includes a change in self-insured retention (SIR).  The City presently self-insures the first $275,000 of each workers’ compensation loss, and relies on excess insurance to cover any losses above $275,000. 

Staff submitted applications not only to the open insurance market, but also to alternative coverage agencies which provide public risk pooling. Public risk pooling is when several entities join forces and enter into a joint powers agreement which allows them to pool resources and realize an economy of scale in order to provide an additional layer of “pooled insurance.” 

This report recommends that the California Public Entity Insurance Association (CPEIA) be selected as the new workers’ compensation excess carrier, and the City’s SIR be increased to $500,000.  CPEIA is an affiliate of the California State Association of Counties (CSAC).

BACKGROUND

Workers’ Compensation coverage is mandatory under California Labor Code.  The law states that all costs for workers’ on-the-job injuries will be borne by the employer.  Sunnyvale, along with many other California cities, made the business decision in the late 1980’s to self-insure a portion of the losses rather than purchase insurance coverage.  By self-insuring, the City has been better able to manage the losses from workers’ compensation through volatile insurance market cycles and has consistently saved money over the price of commercial insurance.

The SIR level traditionally has been between $250,000 and $300,000.  California Labor Code says that losses must be covered “up to statutory limits.”  This means the employer must furnish benefits according to the needs of the injured employee, regardless of cost.  Most workers’ compensation claims costs are well under $275,000.  However, to protect the City’s assets from catastrophic loss, an excess policy of insurance has been put into place which covered losses over the SIR level.

EXISTING POLICY

Legislative Management Sub Element, Policy 7.3H.2 – Provide adequate loss protection in a cost effective way.

DISCUSSION

The Workers’ Compensation insurance market has changed dramatically since the City last renewed and it is no longer an option to secure a three-year policy.  The policy will need to be renewed annually from here out.    Recently enacted legislation may help to stabilize prices in the long run, but the effects of the new laws will not directly affect the City’s quotes for excess workers’ compensation in the near future.

Beginning last September, alternative markets for insurance were researched.  Following are the three markets that were approached for quotation of the City’s excess workers’ compensation coverage, and the options they presented:

Option 1:  Local Agency Workers’ Compensation (LAWCX) – A shared risk joint powers arrangement comprised of small and medium sized cities in the State.  This pool shares $50,000,000 per occurrence coverage. 

Option 2:  California Public Employers Insurance Agency (CPEIA) – A shared risk joint powers arrangement originally comprised of counties in California which has now invited other public entities to join.  This pool shares $100,000,000 per occurrence coverage.

Option 3:  Commercial Insurance, Statutory limits  -  Marsh USA has secured renewal quotes for coverage from the private insurance carriers. 

Option 4:  Commercial Insurance – Per Occurrence limits  - Marsh USA also secured renewal quotes for coverage in per occurrence limits from the private insurance carriers.

SIR LEVEL

The next important item for consideration was how much the City would self-insure.  Traditionally, Sunnyvale has had a SIR of between $275,000 and $300,000.  This is the amount of funds the City planned for each workers’ compensation claim. 

Based upon an analysis of the seven claims that have gone over the $275,000 value in the last ten years, staff recommends that the City should consider self-insuring its workers’ compensation risks up to $500,000 per occurrence.  Based upon preliminary quotes, this change could save the City about $350,000 per year.

A ten-year rate history of the excess workers’ compensation premium with the proposed rate for next year in the shaded section is provided below:

FISCAL IMPACT

The City Manager’s recommended budget for fiscal year 2004-05 budget includes $364,613 to reflect preliminary pricing.  Final rates will be delivered in June once the CPEIA Governing Board formally accepts the City of Sunnyvale as a member.  Final rate may be somewhat lower than the quoted amount, as CPEIA continues to negotiate their reinsurance rates, but will not exceed the original quote.

PUBLIC CONTACT

Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda and report on the City’s web page, and the availability of the report in the Library and the City Clerk’s Office.

ALTERNATIVES

Option 1: Contract with Local Agency Workers’ Compensation Excess Pool at a rate of $381,703 with an SIR of $500,000.

Option 2: Contract with the California Public Entity Insurance Association at a rate of $364,613 with an SIR of $500,000.

Option 3: Contract with a commercial carrier for statutory limits, at a rate of $600,000 with an SIR of $750,000.

Option 4: Contract with a commercial carrier for limits of up to $50 million at a rate of $550,000 with an SIR of $750,000.

RECOMMENDATION

Staff recommends Option 2: contracting with the California Public Entity Insurance Association (CPEIA) risk pool with an SIR of $500,000, for a maximum premium of $364,613 for 2004-05.

Prepared by:

Barbara Coats

Risk and Insurance Manager

Reviewed by:

Mark Gregersen

Director, Department of Human Resources

Reviewed by:

Mary Bradley

Director of Finance

Approved by:

Amy Chan

City Manager

Attachments

A. CPEIA JPA Agreement (pdf format)

B. CPEIA Memorandum of Understanding (pdf format)