Memorandum
City of Lawrence
Administrative Services – Risk Management
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TO: |
David Corliss – City Manager
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FROM: |
Jennifer Harvey – Risk Manager
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CC: |
Frank Reeb – Administrative Services Director Debbie Van Saun – Assistant City Manager
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Date: |
12/6/06
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RE: |
Workers Compensation Excess Insurance Renewal 2007
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Workers Compensation Excess Insurance 2007 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 $750,000. Our current insurance coverage with Midwest Employers Casualty Company (MECC) will expire on January 1, 2007. Based upon the information provided below, it is our recommendation to renew coverage with Midwest Employers Casualty Company (MECC) for a two year period for the policy years of 1/1/2007 to 1/1/2009.
Late this fall I began the process of applying for renewal of our coverage for 2007 with MECC. This process includes a series of applications projecting payroll by worker category codes that define level of risk, worker concentration and payroll by facility, a required consideration since the loss of life on 9/11, vehicle operations, and a thorough explanation demonstrating that our self-administered program follows industry best practices. Although the market has softened some in the last two years, due to the limited number of excess workers compensation insurers doing business in the State of Kansas, supply and demand continues to result in relatively flat to slightly increased premiums. A renewal quote was sought from MECC alone as our program was marketed two years ago to six companies. It is important to note that frequent or annual marketing for a specific line of insurance coverage is not recommended as insurers become wary of responding and quoting coverage repeatedly with no return on their investment.
MECC offered two quotations for 2007 coverage, a no increase flat rate of $.1013 per $100 of payroll maintaining our current SIR levels at $750,000, and a reduced SIR of $600,000 with an increased rate of $.1276 per $100 of payroll. In addition, a multi-year contract was offered locking in rates not only for 2007 but 2008 as well.
MECC’s quote maintaining our current SIR of $750,000 remains our most economical option. Although the rate $.1013 per $100 of payroll remains flat, our projected increased payroll would bring our 2007 premium to $40,961 from 2006’s premium of $36,796. The second option allowing a reduction to the SIR by $150,000 to $600,000 would result in a 2007 premium of $51,596.
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. It is because of these two claims that MECC will not offer an SIR lower than $600,000. Should reserves be funded at an appropriate level, maintaining our SIR at $750,000 remains an acceptable risk.
Chart A 2007 Coverage Options
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MECC Option 1 |
MECC Option 2 |
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Self-Insured Retention |
$750,000 |
$600,000 |
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2006 Premium |
$ 36,796 |
$ 36,796 |
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2007 Premium |
$ 40,961 |
$ 51,596 |
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Premium Increase |
$ 4,165 |
$ 14,800 |
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Rate per $100 Payroll |
0.1013 |
0.1276 |
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Percentage Increase |
11.32% |
40.22% |
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Percentage due to Payroll |
11.32% |
11.32% |
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True Percentage Increase |
11.32% |
28.9% |
· It is important to note that payroll growth also contributes to premium increases as premium is a calculated rate per $100 of payroll. The 2007 quotes were based upon an estimated gross payroll of $40,435,536 for 2007 which represents an 11.32% increase from 2006 estimated gross payroll figures of $36,323,726. 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. From 2002 through 2005 the market severely hardened due to the losses the insurance industry suffered as a result of the attacks of 9/11. In addition, from 1995 to 2006 the City’s gross estimated payroll has increased by 100.94% from $18,076,712 to $36,323,726. We have increased our SIR from $300,000 to $750,000 as a means of stabilizing payroll growth’s impact on overall premium.
Recommendation
We recommend renewing coverage with Midwest Employers Casualty Company (MECC) and accepting their two year contract maintaining our self-insured retention at $750,000 for the policy years 1/1/2007 to 1/1/2009. Please advise should you have additional questions or if I can provide any additional information.
Thank you for your consideration.
