Memorandum
City of Lawrence
Administrative Services – Risk Management
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TO: |
Mike Wildgen – City Manager
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FROM: |
Jennifer Harvey – Risk Manager
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CC: |
Frank Reeb – Administrative Services Director David Corliss – Assistant City Manager Debbie Van Saun – Assistant City Manager
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Date: |
12/22/2004
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RE: |
Workers Compensation Excess Insurance and Boiler and Machinery Insurance Renewals 2005
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Workers Compensation Excess Insurance 2005 Renewal
The Office of Risk Management administers a self-insured, self-administered workers compensation program under the approval of the State of Kansas Division of Workers Compensation and the Department of Insurance. To maintain our program, we are required to purchase excess insurance coverage to protect against catastrophic injury losses in excess of our self-insured retention level (SIR), currently $500,000. Our current insurance coverage with Employers Reinsurance Corporation (ERC) will expire on January 1, 2005. Based upon the information provided below, it is our recommendation to bind coverage with Midwest Employers Casualty Company (MECC) increasing our SIR to $750,000 for the policy year 1/1/2005 to 1/1/2006.
Late this fall we began the process of applying for renewal of our coverage for 2005 with ERC. The excess workers compensation insurance market has demonstrated very little softening nationally. Due to the limited number of excess workers compensation insurers doing business in the State of Kansas, supply and demand has resulted in continued premium increases as well. Although we have had two relatively good years of experience, initial responses from ERC were not positive. Specific concerns were expressed regarding the two claims (one in 1999, the other in 2001) that have exceeded the self-insured retention levels for their respective claims years. Our broker recommended we market to additional insurers to seek alternate options. Six companies were approached. Three companies agreed to quote and bind coverage with us; our current carrier, ERC, MECC, and Safety National Casualty Company (SNCC).
ERC quoted two coverage options, one increasing the SIR to reduce the increase of premium. To maintain our current level of coverage with ERC, which has a SIR of $500,000, our premium would increase from $36,612 to $58,003 (58.43% increase). This is shown as ERC Option 1 in the Chart A below. The ERC option with the least premium increase is ERC Option 2; however this option would increase our SIR to $750,000 with premium still increasing to $43,485 (18.77%).
MECC also offered quotations for 2005 coverage including SIR levels of $500,000 and $750,000. You may recall that MECC provided our excess insurance coverage from 1996 through 2002. With the 2003 renewal the City chose to bind coverage with ERC as they offered a lower premium. MECC’s quote with an SIR of $750,000 is the most economical premium, $33,909. Compared with ERC’s $750,000 SIR quote of $43,485, MECC’s quote represents premium savings of $9,576.
From a claims history and self-insured retention perspective, only twice in over 10 years have we exceeded our SIR level. The 1999 claim from the serious injury and subsequent death of a Public Works Street Division employee is projected to exceed its SIR of $500,000. The 2001 claim from a serious injury to a Public Works Solid Waste employee exceeded the SIR of $300,000. Therefore, should reserves be funded at an appropriate level, increasing the SIR to $750,000 may be an acceptable risk.
Chart A 2005 Coverage Options
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ERC Option 1 |
ERC Option 2 |
MECC Option 1 |
MECC Option 2 |
SNCC Option 1 |
SNCC Option 2 |
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Self-Insured Retention |
$ 500,000 |
$750,000 |
$500,000 |
$750,000 |
$500,000 + $150,000 Aggregate Deductible |
$ 750,000 |
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2004 Premium |
$ 36,612 |
$ 36,612 |
$ 36,612 |
$ 36,612 |
$ 36,612 |
$ 36,612 |
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2005 Premium |
$ 58,003 |
$ 43,485 |
$ 65,023 |
$ 33,909 |
$ 61,002 |
$ 34,702 |
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Premium Increase |
$ 21,391 |
$ 6,873 |
$ 28,411 |
$ (2,703) |
$ 24,390 |
$ (1,910) |
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Rate per $100 Payroll |
0.1702 |
0.1276 |
0.1908 |
0.0995 |
0.179 |
0.102 |
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Percentage Increase |
58.43% |
18.77% |
77.60% |
-7.38% |
66.62% |
-5.22% |
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Percentage due to Payroll |
4.44% |
4.44% |
4.44% |
n/a |
4.44% |
n/a |
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True Percentage Increase |
53.99% |
14.33% |
73.16% |
n/a |
62.18% |
n/a |
· It is important to note that payroll growth also contributes to premium increases as premium is a calculated rate per $100 of payroll. The 2005 quotes were based upon an estimated gross payroll of $34,079,095 for 2005 which is a 4.44% increase from 2004 estimated gross payroll figures. Therefore, 4.44% of the premium increases are the result of payroll growth. Chart A shows the total percentage of increase minus payroll growth as True Percentage Increase.
Workers Compensation Excess Insurance Program Historical Data
Pages three and four of this memo contain graphs and a spreadsheet depicting the history of our excess workers compensation insurance coverage. From 1996 through 2001 the City benefited from a softer insurance market. However, from 1995 to 2005 the City’s gross estimated payroll has increased by 88.6% from $18,076,712 to $34,079,095. We have increased our SIR from $300,000 to $750,000 as a means of stabilizing payroll growth’s impact on overall premium.
Boiler and Machinery Insurance 2005 Renewal
The Office of Risk Management maintains a boiler and machinery insurance policy for loss caused by sudden and/or accidental mechanical or electrical equipment breakdown to our boilers, large water heaters, HVAC Systems, and mechanical equipment. Our current coverage is a three year policy with the Cincinnati Insurance Company last renewed on 12/31/01. Premiums are paid annually and adjusted annually for any additions or deletions to covered objects. This policy is subject to full renewal on 12/31/04. Cincinnati Insurance has offered us another three year policy contract that will run from 12/31/04 to 12/31/07. The annual premium payable on 12/31/04 for 2005 will be $4,088. This represents an increase of 13% ($468.00) from the 2004 premium of $3,620.
Cincinnati’s coverage and premium remain very competitive in the boiler/machinery insurance market. Last year we were approached by our current property insurer, St. Paul – Travelers, expressing interest in combining this coverage with our property insurance. However, they were unable to compete with Cincinnati’s coverage and premium. We continue to have excellent claims history with no claims on record.
Recommendation
We request that these items be placed on the December 28, 2004 City Commission Consent Agenda. We recommend that the commission consent to allow us to bind coverage with Midwest Employers Casualty Company (MECC) increasing our self-insured retention to $750,000 for the policy year 1/1/2005 to 1/1/2006 and consent to allow us to bind three year coverage with The Cincinnati Insurance Company for boiler and machinery coverage for the policy years 12/31/2004 to 12/31/2007. Please advise should you have additional questions or if I can provide any additional information. Thank you for your consideration.
