Memorandum
City of Lawrence
Administrative Service Department
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TO: |
David L. Corliss – City Manager
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FROM: |
Jennifer Harvey – Risk Manager
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CC: |
Frank S. Reeb – Administrative Services Director, City Clerk Cynthia Boecker – Assistant City Manager Diane Stoddard – Assistant City Manager Jonathan Douglas – Assistant to the City Manager
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Date: |
December 11, 2008
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RE: |
January 1, 2009 Excess Workers’ Compensation Insurance Renewals
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Introduction
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 two year insurance coverage agreement with Midwest Employers Casualty Company (MECC) will expire on January 1, 2009. Based upon the information provided below, it is our recommendation to renew coverage with Midwest Employers Casualty Company (MECC) for a one year period for the policy year of 1/1/2009 to 1/1/2010.
Background Excess Workers’ Compensation Insurance
Early this fall I began the process of applying for renewal of our coverage for 2009 with MECC. This labor intensive 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 concentrated loss of life in New York City on 9/11); vehicle operations; and a thorough explanation demonstrating that our self-administered program follows industry best practices. In addition, AJ Gallagher, the Broker that brings our property insurance coverage to us, approached us with an attractive quote from Safety National Casualty Corporation. I provided them this information as well. As noted in previous year’s memos on this topic, there are a very limited number of insurers that offer excess workers’ compensation insurance coverage for our size organization in Kansas.
Frank and I met with the Broker that currently brings our excess workers’ compensation coverage to us, the Willis Group (formerly Charlton Manley and HRH). At that meeting we advised him that we had a competitive quote that we would review along side any renewal quote offered by MECC. Willis looked for any other markets that might be willing to quote us as well, but no other insurers were interested in providing coverage for us. 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 Quote
As Chart A below shows, MECC offered two quotations for 2009 coverage, a decrease in rate of $.0904 per $100 of payroll (down from $.01013) maintaining our current SIR level at $750,000, and a reduced SIR of $600,000 with an increased rate of $.1278 per $100 of payroll. Option 1 would decrease our premium from $44,277 (2008 estimated) to $40,608 (2009 estimated). Although we are ending a multi-year contract, MECC declined to offer another multi-year contract citing concerns regarding the frequency of our injuries/losses. In addition, some experts predict that we are heading back into a hardened insurance market due much to the state of the economy. Therefore MECC was reluctant to lock in a two year rate. MECC has an A.M. Best’s Rating of A+ XV which represents a superior rating in the $2,000,000 or more financial size category.
Safety National Casualty Corporation Quote
Safety National offered two quotations as well for 2009 coverage, a rate of $.0743 per $100 or payroll and a SIR level of $700,000, and a reduced SIR of $500,000 with a rate of $.127 per $100 of payroll. Again referencing Chart A below, Option 1 would decrease premium from $44,277 (2008 estimated) to $33,377 (2009 estimated). A multi-year quote was requested, but Safety National declined to offer this as well. Safety National has an A.M. Best’s Rating of A IX which represents an excellent rating in the $250,000 to $500,000 financial size category.
Chart A 2009 Coverage Options
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MECC Option 1 |
Safety National Option 1 |
Comparison |
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Self-Insured Retention |
$750,000 |
$700,000 |
$ (50,000) |
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2008 Premium |
$ 44,277 |
$ 44,277 |
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2009 Premium |
$ 40,608 |
$ 33,377 |
$ (7,231) |
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Premium Change |
$(3,669) |
$(10,900) |
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Rate per $100 Payroll |
0.0904 |
0.0743 |
-0.0161 |
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Percentage Change |
-8.29% |
-24.62% |
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Percentage due to Payroll |
2.77% |
2.77% |
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True Percentage Change |
-11.06% |
-27.39% |
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· It is important to note that payroll growth also contributes to premium increases as premium is a calculated rate per $100 of payroll. The 2009 quotes were based upon an estimated gross payroll of $44,921,330 for 2009 which represents a 2.77% increase from 2008 estimated gross payroll figures of $43,709,065. Chart A shows the total percentage of change minus payroll growth as True Percentage Change.
Comparison
While strictly comparing rates, Safety National would offer us a premium decrease of $7,231 and a $50,000 decrease in our SIR. However, we must also weigh other factors such as services provided and service delivery. It is important to also consider that too frequent jumping from insurer to insurer diminishes our attractiveness and could hinder our options in the future.
I sought input from other Risk Managers throughout the country who had history with Safety National via PRIMA Talk, which is an internet network of other Public Risk and Insurance Management Association members. I received several responses that were a mixed bag of good versus not so good experiences and opinions regarding Safety National. To summarize, most recognize MECC as the premier carrier in our market with considerable online training, loss control and consulting services. Safety National is the next largest competitor, but is considered more of a nuts and bolts insurance carrier. They do not offer comparable consulting, loss control, and training services as compared to MECC. Safety National in our quote did agree to provide us 100 hours of free online training through another vendor.
As a result of the Kansas Department of Labor Inspections, we have increased our utilization of MECC’s online resources (Safety Cornerstones) to access template policies, procedures and future training. MECC estimates utilization and access to their online services to have a financial value of approximately $15,000. The importance of these services will continue as we complete the requirements and recommendations coming from the KDOL through their facility and program inspections.
Potential for Savings Identified by MECC
A Total Cost of Risk (TCOR) proposal was performed as part of MECC’s services to us. Their analysis indicated that the City of Lawrence has the opportunity to reduce actual losses and associated indirect costs. The following is an example from their proposal of how the City could capture a portion of its lost economic opportunity (LEO):
In order to achieve the potential savings, MECC recommends the following services through MECC University and Safety Cornerstones online services.
Historical Data Excess Workers’ Compensation Insurance
Pages five and six 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. The semi-softened market we have enjoyed for the last three years is coming to an end. We will most likely see increases at our 2010 renewal. In addition, from 1995 to 2009 the City’s gross estimated payroll has increased by 148.55% from $18,076,712 to a projected $44,921,330. We have increased our SIR from $300,000 to $750,000 as a means of stabilizing payroll growth’s impact on overall premium.
Recommended Action
Staff recommends renewing coverage for Excess Workers’ Compensation Insurance with Midwest Employers’ Casualty Company for the insurance period of 1/1/09 to 1/1/10 for an estimated premium of $40,608. The reduction in premium of only $7,231 between MECC and Safety National would not offset valuable risk management services and our established relationship with MECC. The City spent $752,000 in calendar year 2007 on worker’s compensation claim costs and is on course to spend $600,000 for 2008. The greater potential for cost savings can be achieved by increased use of MECC’s risk management services and other loss control efforts. Should you have further questions, please do not hesitate to contact Frank or me.
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Workers' Compensation Excess Insurance Coverage History |
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Proposed Renewal |
Two Year Contract |
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2009 |
2008 |
2007 |
2006 |
2005 |
2004 |
2003 |
2002 |
2001 |
2000 |
1999 |
1998 |
1997 |
1996 |
1995 |
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Insurer |
Midwest Employers Casualty |
Midwest Employers Casualty |
Midwest Employers Casualty |
Midwest Employers Casualty |
Midwest Employers Casualty |
Employers Reinsurance Corporation |
Employers Reinsurance Corporation |
Midwest Employers Casualty |
Midwest Employers Casualty |
Midwest Employers Casualty |
Midwest Employers Casualty |
Midwest Employers Casualty |
Midwest Employers Casualty |
Midwest Employers Casualty |
Employers Reinsurance Corporation |
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Workers' Compensation Limit Each Accident Disease |
Statutory |
Statutory |
Statutory |
Statutory |
Statutory |
Statutory |
Statutory |
Statutory |
Statutory |
Statutory |
$1,000,000 |
$1,000,000 |
$1,000,000 |
$1,000,000 |
$1,000,000 |
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Employer's Liability Limit Each Accident Disease |
$1,000,000 |
$1,000,000 |
$1,000,000 |
$1,000,000 |
$1,000,000 |
$1,000,000 |
$1,000,000 |
$1,000,000 |
$1,000,000 |
$1,000,000 |
$500,000 |
$500,000 |
$500,000 |
$500,000 |
$500,000 |
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Retention (Police/Fire) |
$750,000 |
$750,000 |
$750,000 |
$750,000 |
$750,000 |
$500,000 |
$500,000 |
$500,000 |
$400,000 |
$400,000 |
$500,000 |
$500,000 |
$300,000 |
$300,000 |
$300,000 |
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Retention (All Other) |
$750,000 |
$750,000 |
$750,000 |
$750,000 |
$750,000 |
$500,000 |
$500,000 |
$400,000 |
$300,000 |
$300,000 |
$500,000 |
$500,000 |
$300,000 |
$300,000 |
$300,000 |
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Rate per $100 Payroll |
0.0904 |
0.1013 |
0.1013 |
0.1013 |
0.09950 |
0.11220 |
0.09350 |
0.0742 |
0.053 |
0.053 |
0.053 |
0.069 |
0.071 |
0.071 |
0.1173 |
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Gross Payroll |
$44,921,330 |
$43,709,064 |
$43,709,064 |
$36,323,726 |
$34,079,095 |
$32,631,130 |
$32,788,925 |
$28,799,056 |
$26,439,590 |
$26,456,308 |
$25,415,778 |
$26,025,866 |
$21,868,834 |
$20,472,658 |
$18,073,712 |
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Premium |
$ 40,608 |
$ 44,277 |
$ 44,277 |
$ 36,796 |
$ 33,909 |
$ 36,312 |
$ 30,658 |
$ 21,369 |
$ 14,013 |
$ 14,022 |
$ 13,470 |
$ 13,794 |
$ 15,697 |
$ 14,536 |
$ 22,945 |