HomeMy WebLinkAbout1990-11-06; City Council; 10898; GENERAL LIABILITY INSURANCE COVERAGE OPTIONSr
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AB#m TITLE: GENERAL LIABILITY INSURANCE DEPT.
MTG. 11/6/90 - COVERAGE OPTIONS CITY I
DEPT. RM CITY I
RECOMMENDED ACTION:
Direct staff to submit an application for membership to the California Municipal
Insurance Authority (CMIA).
ITEM EXPLANATION
Since 1986, commercial liability insurance for public agencies, especially
municipalities, has all but disappeared. Attempts to find such coverage in the
traditional insurance markets have been unsuccessful. Cal-Surance, the City’s
insurance broker, has made repeated inquiries into the marketplace but has found
either little or no interest.
The City of Carlsbad has been without auto and general liability insurance coverage
and public officials liability protection since the cancellation of its policies in early
1986. As a result, one of the on-going objectives of the Risk Management
Department has been to try and locate a source of liability coverage for the City.
Such a source would provide the City Council with the opportunity to determine
whether the City should continue to remain self-insured or whether it should absorb
the cost of acquiring whatever limited coverage is available.
In late 1989, a limited amount of Commercial General Liability Insurance began to
become available. During that same time period, the City had completed the review
process for membership in a municipal insurance pool.
After reviewing the situation at length, it was determined that further study of the
problem was warranted and that outside assistance should be utilized in order to
provide the City with an in-depth analysis of the limited, but expanding, number of
options that were becoming available for consideration.
In March of 1990, Mr. Don Voller, of Tillinghast, a Division of TPF&C, the City’s
benefit consultant, was asked to provide consulting services for this task. At his
recommendation, applications for coverage were submitted to two national insurana
brokerage firms for marketing. Frank B. Hall and Sedgwick James were utilized for
that purpose. Each firm was directed to shop in markets that were available to ther
but to refrain from duplicating each others efforts. As a result, one proposal for
coverage was received from each of those brokers for consideration. In addition, M
Voller conducted a review of existing municipal insurance pools in order to determi1
whether or not any of them would provide a viable option for consideration.
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Mr. Voller analyzed the commercial insurance proposals and the various municipal
insurance pool programs and submitted his recommendation to the City on
September 20, 1990. It should be noted that City staff participated in the discussions
regarding the various program proposals on an on-going basis.
At this point in time, there are three alternatives available to the City:
1.
2.
3.
Staffs recommendation is that (a) the pooled insurance alternative (#3) be selected
and (b) the City of Carlsbad submit an application for membership to the California
Municipal Insurance Authority (CMIA) in order to acquire general liability coverage
through its pooled insurance program.
FISCAL, IMPACT
At this point in time, there is no fiscal impact upon the City. However, once the
application process is completed, payment of the deposit premium will be required.
It is anticipated that the deposit premium for membership in the California Municipa
Insurance Authority (CMIA) will be in the range of $400,000 annually. Entry into thc
program in mid-year will result in the premium being prorated.
EXHIBITS
1.
Continue to assume the liability risk and remain self-insured;
Acquire liability insurance coverage through the commercial market; or
Acquire liability insurance coverage through a pooled insurance program.
Liability Insurance Proposals Options Analysis
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CITY OF CARLSBAD
LIABILITY INSURANCE PROPOSALS
OPTIONS ANALYSIS
Prepared By:
Tillinghast, A Towers Perrin COmpa
September 19, 1990
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CITY OF CARLSBAD
LIABILITY INSURANCE PROPOSALS
OPTIONS ANALYSIS
BACKGROUND
The City of Carlsbad is uninsured with respect to liability rid
The City adopted this position three years ago when the commerciz
insurance market became extremely restrictive, and the coverage ai
limit of insurance available offered little, if any, cost benefii
The City explored entry into the JPA formed by cities in San Die<
County but chose not to participate. Faced with a growing concei
about remaining O1bare1' on liability risk and having received i
offer from the California Municipal Insurance Authority (CMIA) , tk
City is interested in an in-depth analysis of the CMIA proposal a1
a further analysis of available options.
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DISCUSSIONS OF OPTIONS
Tillinghast reviewed the present liability risk program of the Cii
of Carlsbad. Exhibit A. is a discussion of the present program ai
the options that are available to the City. Our discussion rep0
recommended that the City change from its program of total sel
insurance and consider a variety of options available to cap t
City's liability risk. The recommendations specifically called f
the consideration of either commercial excess liability insuran
or participation in a risk management and insurance Joint Powe
Authority. As a result of the recommendation City staff underto
to acquire commercial insurance quotations and to evalua
additional JPAs in comparison to the existing proposal to join t
California Municipal Insurance Association (CMIA).
ANALYSIS OF INSURANCE AND RISK MANAGEMENT JPAS
We evaluated a number of JPAs based upon information developed
the League of California Cities and independent informati
obtained through Tillinghast client sources. The comparison
five individual JPAs are displayed in Exhibit B. In additic
since one of the key factors in comparison involves insurar
policy coverage, we have displayed the coverage differences
Exhibit C. The differential between the JPAs is not great wk
objective issues are charted. There are other issues, howevc
that are important: ,
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0 Two of the JPAs (BICEP and ICRMA) are capitalized by th
utilization of Certificates of Participation (COP). Ne
members have to participate in the COP on a pro-rata basis
We do not recommend consideration of a JPA funded in thi
manner as it becomes an unnecessary financing technique
Experience appears to demonstrate that JPAs can b
successfully funded by annual premium contributions withou
the necessity of using COP.
0 Tillinghast believes that long term stability c
administration and management of the JPA is best accomplishe
by the use of full time staff. Management under thes
conditions is more stable and the interests of the members ar
better reflected by the staff. SANDPIPA and OCCRMA ar
supported by independent outside consultants in key areas c
risk management and underwriting. Both of these JPAs ha\
opposed building staff. ICRMA is managed by one consultant c
a I1turnkeyl1 basis, which is and improvement over tk
individual consultant approach. BICEP is in the process c
hiring an independent risk manager, continuing to rely untj
then on the services of the insurance broker for the JP2
CMIA has taken the approach of using fulltime staff and j
managed by an individual with an outstanding reputation in tk
public sector.
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0 Financial condition of the JPA is a critical element i
developing long term stability and cost control. We ha
access to detailed financial information for CMIA, SANDPI1
and BICEP. All three of these JPAs are very solid from
financial standpoint. The attitude of the JPA from
financial standpoint is important because it impacts tk
stability of annual premium funding. The more conservatiT
the approach, the greater premium cost stability is expectc
to be achieved. SANDPIPA appears to be the most conservatil
in its approach, but all three JPAs are consewative. It :
not anticipated that great fluctuations will occur on i
annual basis, absent unusually bad loss experience.
Finances can be affected by the amount of loss that is poolec
None of the JPAs pooled what we believe to be an excessi.
amount of loss. Based upon the number and size 1
participants, only BICEP appears to be pooling
extraordinary amount. But, even in BICEP, this amount
pooled loss is mitigated by the existence of COP financi
that is the JPA's backup source of funding.
o Geographic concentration of participants can be a significa
issue, particularly when the participants are commonly pooli
or consulting on other areas of operation. Initially, JP
were concentrated geographically but as they have expande
there are been a tendency to acquire members throughout t
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state or at least in contiguous counties. In our. opinior
geographic distribution of membership is not a drawback to
successful JPA. The issue of geographic concentration is be:
evaluated by the City as it reviews its links with other Sz
Diego or Orange County cities.
0 All JPAs are expanding their rlproductrl line. Most JPAs we]
formed to pool liability risk, but most that have SOI
maturity offer other insurance products generally on a joii
purchase basis rather than an approach through the pooling (
loss. The only differences between JPAs with respect to th.
question is in the length of time that the JPA has been .
operation. Virtually all JPAs are attempting to broaden tl
insurance products and services offered to their membershi]
COMMERCIAL INSUWCE PROPOSALS
The City has received two commercial excess liability insuran
proposals. The terms of coverage and the limits and cost a
reflected in Exhibits C. and D. One of the important subjecti.
issues with respect to commercial insurance is the durability
the insurance market and the stability of annual premium cost. T
insurer sponsored by Frank B. Hall has been in the public sect
marketplace for many years. Its coverage and cost have vari
somewhat over this period but it has never failed to provide
market of some value even in the most difficult of times. T
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market sponsored by Sedgwick James is new to the public entit
market, but the overall program manager has been in the publi
sector for many years. With the use of another insurer thj
program manager was the last provider of excess liability insuranc
to the City of Carlsbad.
CONCLUSIONS AND RECOMMENDATIONS
0 The commercial excess liability insurance proposals ai
reflective of the most competitive market conditions in tl
past decade. Des-pite the competitiveness of the market, tl
cost remains high and will probably increase at the ne:
market turndown. Coverage is reasonable in relation to th;
offered by JPAs. Coverage, however, has been more restrictiy
in the past and similar to premium cost will probably chanc
to a more restrictive form at any market turndown.
0 Early indications of maturing experience seem to indicate th,
JPAs are doing a good job of fulfilling their objective *
stabilize premium cost over a period of time. We anticipa.
that this will continue in those areas of cost that a
pooled. The JPAs are still subject to the insurance market 1
excess layers of liability insurance where the JPA acts as
agent for the participants. The bulk of the cost
liability, however, is still contained in the pooled layers
that the cost fluctuation, while not eliminated, is heavily mitigab
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0 In our preliminary evaluation, we reduced the JPA options 1
CMIA and SANDPIPA. We recommend that CMIA be the JPA c
choice for the City. In our opinion, they have demonstratc
competitive cost and a flexibility of approach. They a15
have a fulltime staff that is professional and attentive 1
the needs of their members. This JPA also continues to grc
and attract new participants. As this growth continues, thc
should achieve greater stability and offer better purchasii
power in the non-pooled risk areas.
0 We recommend that the City move from its present position 1
non-insurance on liability risk and apply to CMIA fl
acceptance and an updated cost proposal for the current yea
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CITY OF CARLSBAD
LIABILITY OPTIONS ANALYSIS
SUMMARY
Tillinghast has reviewed the options available to the City of
Carlsbad with respect to the funding of liability risk and have
the following recommendations:
0 Request a proposal from S. J. Petrakis Insurance Services,
Inc. for liability insurance with a $10 million limit of
liability, excess of optional Self Insured Retentions of
$250,000, $500,000 and $1 million per occurrence
o Request a proposal from the AIG Companies for liability
insurance with a $10 million limit of liability, excess of
a Self Insured Retention of $1 million.
o Request the broker selected by the City to secure the AIG
proposal to verify the availablity of any special programs
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that might be available to the City that would provide
insurance and not be solely a cost plus mechanism.
0 Select a Joint Powers Authority (JPA) from either the
California Municipal Insurance Association (CMIA) or the S
Diego Pooled Insurance Program Authority (SANDPIPA) and
request a proposal to affect membership. As the first ste
in implementing this recommendation, request SANDPIPA to
make a presentation to the City as to the current status o
its program including financial information, participant
profile and governance issues.
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BACKGROUND
The City is currently uninsured for liability risk. It has
expressed an interest in evaluating options that may be availabl
to the City to fund liability risk. We considered several
options including the City remaining uninsured:
CURRENT CITY LIABILITY PROGRAM
Currently the City is without insurance for liability risks.
This is an unusual situation within the California public sector
o Going completely without insurance is against a clear trenc
When public entities were unable to acquire affordable
insurance in the mid '80s, most of them participated in JPI
that permitted them to pool risk. Subsequently, all JPAs
have been able to purchase excess insurance above the poolt
limits putting a reasonable cap on potential liability for
its participating members. Many of those that have remainc
out of the participation in a JPA have purchased some form
of commercial excess insurance as the insurance market has
marginally improved.
0 Going completely.without liability insurance is rare for a
City the size of Carlsbad. Many of the public entities th
have remained llbarelt are considerably larger and have more
financial resources.
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0 The impact of going bare on liability risk must be evaluate
in conjunction with the potential for a catastrophic loss
involving several exposure areas. An illustration of the
linkage of exposure areas will serve to clarify this
threat.
Earthquake and fire are two perils that could trigger a
combined loss involving several areas of exposure. These
two perils may occur singly or in combination. Negligence
in the case of earthquake may be hard to establish but man!
entities believe that the courts may take a strict liabilii
stance on loss arising out of earthquake and involving Cit]
property. Under either the earthquake or fire scenario,
several categories of loss could be involved:
0 Direct damase to City DroDertv. This risk is general
insured.
0 Internmtion of Citv Services. This category of loss
could involve a delay in income and substantial
expediting expense to get the services back into
operation.
0 Third Partv Liabilitv. This risk can involve injury
persons occupying City property at the time of damage
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or destruction and consequential damage to third part!
property arising out of fire from City premises.
0 Workers' Compensation. A number of employees could
injured in the same occurrence where third party
injuries are sustained.
The key issue is that an occurrence could take place in
which liability is only one aspect of the loss and the Cit
could be materially impacted on such combined events.
Evaluation
Running against such a strong trend within the public sector,
is in the interest of the City to investigate the options to
their present program.
City may not evidence a major catastrophic potential, it may no
be the best allocation of City resources to completely self fun
liability risk.
id
While the present risk profile of the
COMMERCIA& INBURANCE
Historical Pers~ective
The commercial insurance market has changed over the last decad
in several important areas. Cost has materially increased and
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the availability of insurance has materially decreased. -This ha
occurred at a time when the overall insurance market expanded
substantially in capacity and the cost of insurance has continue
to decline.
perception of their profit potential in writing public sector
business.
This anomaly appears to stem from insurers'
0 Premiums :
Premiums applicable to the public sector have remained
higher than the balance of the insurance market at both hi(
and low times of the insurance market cycle. This appears
to be primarily a function of limited competition for pub1
sector business. While JPAs have had some affect in keepi.
commercial insurance premiums from rising even more than
they have, until there is greater capacity and more
competition, it does not appear that premium rates will co
down. In fact, it would appear that what limited insuranc
is now available is rising in cost.
0 Self Insured Retentions (SIRS):
One very effective way for an insurer to increase its cost
is to raise SIRs while keeping premiums relatively stable.
In today's insurance market, SIRs are routinely from
$250,000 to $l,O,OO,OOO per occurrence before excess
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insurance is available. This technique effectively furthe
removes the insurer from loss but keeps the premium level
about at the same point.
0 Policy Coveracre:
Another major cost impact comes from restricting the
coverage that is offered, again without any corresponding
decrease in the premium level. Some programs were switche
to claims made from occurrence and restrictions were place
upon the coverage made available for errors and omissions
risks, street and road design risks, police activity and a
number of other areas that varied in importance depending
upon the entity and the exposure that existed. For exampl
dam and reservoir exclusions became common and, while this
did not impact all entities, for those that it did, the
impact was substantial since it involved catastrophic and
not routine risk.
Current Insurance Market Condition
The current insurance market for public entities is relatively
small but those insurers that have remained in the market have
been stable. The commercial insurance market may fluctuate bul
as of now, it would appear to be primarily composed of:
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0 S. J. Petrakis Insurance Services, Inc. IPetrakis)
This is a general agency that has specialized in public
sector business for a number of years. Its primary insurer
until recently has been the Planet Insurance Company which
is a member of the Reliance Insurance Companies group. It
is an admitted insurer in the state of California and is
rated by Best's as A:X. When it first entered the market,
this insurer offered excellent coverage and cost. Over a
period of time, however, the coverage was substantially
restricted and cost rose both as a result of premium and SI
increases.
In 1990 Petrakis was forced to seek another insurer because
of the cost and restrictive coverage features of the Planet
program. They have replaced the Planet with the Insurance
Company of the West (ICW). ICW is headquartered in San
Diego. The company is admitted in the state of California
and carries a Best's rating of A:VII, generally on the low
end of acceptability from a size standpoint. Recent
available results of the insurer, as indicated in Best's,
appears to be favorable. ICW has greatly improved the
coverage offered-by the Planet program and indications are
that ICW can offer up to $10 million in limits of coverage
If the entire limit were put out on ICW paper, details of
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their reinsurance would be needed since this company is toc
small for that size limit without quality reinsurance.
Early indications are that ICW would require a $250,000
minimum SIR under their program.
available. The program in ICW has not been in force long
enough to get a sense as to premium cost but Petrakis has
indicated that it will do as well or better than the Plane!
with improved better coverage.
Higher SIRs would be
Generally, Petrakis requires an agent or broker to represe:
their program exclusively.
require two agents or brokers if other parts of the market
were to be considered.
This means that the City may
0 AIG ComDanies
This insurance group has remained active in the public
sector for a number of years.
it has been active in programs that require high SIRs,
generally in the $1 million-and-over range.
been active in high excess layers of insurance and in
writing excess insurance for California JPAs.
solution to the absence of insurance for Carlsbad by
allowing the City to take a high SIR and securing
catastrophe insurance above that level.
For the most part, however,
It has also
It could be
An actual proposa
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from the AIG is required before any cost benefit analysis
can be considered. High SIR programs tend to vary from one
entity to another too much to make a reasonable prediction
about cost.
0 Other
There are no other consistent programs currently available
in the commercial insurance market. There are from time tc
time individual proposals that are developed but most of
these are on some form of cost plus basis and they do not
adequately provide insurance protection.
assist the City in the spreading of loss over a period of
time in the event that an individual loss or series of
losses fall within a short time frame that might put a
strain on a City's cash position.
They primarily
Evaluation
Both the Petrakis program and the AIG program are viable option
for the City.
premium cost to be determined. Securing a proposal from both
groups, plus any miscellaneous individual insurance proposals
that might be available, would be in the interest of the City.
Coverage offered is reasonable with only the
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JOINT POWER8 AUTHORITIES
(POOLING)
A Joint Powers Authority (JPA) has three primary functions:
0 Provide a vehicle for the pooling of liability and other
risks among participants.
0 Act as a joint purchasing group to provide excess insuranc
0 Provide risk management services to augment the efforts of
the participating members.
These functions are all predicated upon participants making lon
term commitments to the JPA.
In virtually all JPAs, participants do not pool all layers of
loss. Each participant assumes a first layer of loss directly
and above that point, the JPA then pools losses up to the next
layer where the JPA is able to purchase excess insurance. In
theory, the amount of loss pooled will vary from time to time
with the insurance market willingness and capacity to provide
affordable excess insurance. While some additional JPA histor;
is necessary to verify whether or not this function has operatt
successfully, it appears at this time that it has, in fact, dol
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so.
that serve the small and medium sized public entities that are
not able to take on massive self insured retentions of their owl
Probably the function has worked the best for those JPA's
JPA's have also been extremely active in providing risk
management services to members.
been two-fold. First, risk management and risk control is
essential to the success of any self-insured venture,
joint pooling concept is indeed a joint self-insurance venture.
Risk management and risk control activities help to protect the
viability of the pool-by reducing and mitigating loss to its
members. Secondly, risk management and risk control measures
were established as an enticement to the commercial insurance
marketplace to provide the catastrophic excess insurance layers
Risk management and risk control to protect the viability of
pools has been a hit and miss function thus far since pools havc
varied so widely in their application of requirements. There h(
been some reluctance to discipline participants and the functio
has probably offered more value in screening out new applicants
who are not risk control oriented.
commercial excess insurance has remained largely theoretical an
it appears that the availability of excess insurance is still
motivated primarily by the economics of the insurance market.
The purpose of this activity h;
and the
The function of attracting
JPAs have practically no variation in the concept on which they
are established. There are, however, a number of areas where
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JPAs have both objective and subjective differences and these
need to be understood in looking at the selection of a JPA:
Capitalization
JPAs are, in fact, insurance companies in organization and
operation. GASB 10 recognizes this similarity in proposed
accounting rules that will be applicable to pooling entities anc
in turn, to their participants. There are two basic approaches
to capitalization:
0 JPAs will capitalize on the basis of annual premium
contribution.
it could be quickly depleted of capital and result in an
early lvcapital callvv on the participants. As JPAs age, th
concern tends to dissipate and has not been a problem in
California JPAs, thus far.
In this approach the JPA runs the risk that
0 Some JPAs have capitalized by the issuance of tax exempt
Certificates of Deposit (COP). This approach was an answe
to the concern over early depletion of capital. It was a1
felt that this approach would further attract excess
insurers and reinsurers since they would be dealing with a
JPA that had, through the use of debt obligations, "pre-
funded" any potential major losses situations.
are operating successfully with the use of COP
Several JE
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capitalization, but, in retrospect, the use of COPS may no
have been as necessary as it was believed originally. New
participants into such pools have to assume their percenta
obligation of the COP debt by crediting the obligation of
the original participants.
Membership Profile
JPAs do not have the large number of participants (insureds)
common to a commercial insurer. As a result, it is very
important that the pooling participants have certain
characteristics that have a significant influence on the overal
success of the JPA:
0 GeoaraDhic Continuity
There are both pluses and minuses to JPAs comprised of a
geographic continuity of participants.
- A JPA comprised of participants on a statewide basis
could tend to produce more favorable loss results
overall. Northern California experience generally rc
better than Southern California in both liability anc
workers' compensation risks and will tend to balance
out the Southern California experience.
- Entities that have geographic continuity, however, h?
opportunities to share in other forms of Joint Power:
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Authorities or participate in county or regional
problem solving and, as a result, are better acquainte
with management approach in the regional entities.
0 Size/similaritv of Services
JPAs with entities of reasonably similar size and services
creates a homogeneity that can be important in the
construction of policy coverage and the development of
excess insurance for the JPA in total.
0 Financial Condition/Manasement
Management and financial condition are important factors ir
successful pooling. Participants are comfortable with and
are able to work out problems when they are pooling with a
peer group with respect to management philosophy and
direction and where financial condition is healthy.
Financial condition impacts the degree to which an entity :
able to fund their own SIRS and their pool share and also
the degree to which they will be supportive of risk
management practices within their entity.
0 Losses
Losses are generally the outcome of management practices,
financial condition, size and services. To the extent tha
these conditions are similar, the pool participants should
develop reasonably similar long term loss experience. The
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are, however, aberrations, and knowledge of loss experienct
significantly different from the City could be a reason to
avoid such an entity as a pooling partner.
Governance
Most JPAs are established with similar terms and conditions of
membership. The most important conditions deal with:
0 Underwritina Reauirements for Membershir,
Most JPAs have an underwriting committee that will
review new members with concentration on an analysis 1
risk management practices of the entity.
0 Conditions for Withdrawal
A two to three year withdrawal condition is not
unusual. In the case of some JPAs where coverage is
a claims made basis, withdrawal can be effected with
six month notice, but withdrawal from such JPAs are a
problem with respect to how to provide for the needed
"tail insurance" for claims made subsequent to the
withdrawal date.
cost
It is important to obtain a financial statement of the JPA and
some history as to premium levels and the magnitude of
assessments that have been required to keep the JPA funded. It
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is also important to look at the level of risk sharing as well a
the overhead expenses being generated by the JPA.
Future Goals
A JPA should provide an explanation of its future and the visior
it has of the JPA profile for the future.
primarily with the direction of the JPA as it involves expansioi
of its base of participants and any anticipated change in profi:
of the members in terms of geographic location, size, type of
entity, and type of services provided.
This should deal
Evaluation
We have reviewed a number of JPA potentials for the City. We
recommend against participation in a JPA capitalized by COPS. 1
the remaining JPAs, we recommend that the City investigate two.
The first is the California Municipal Insurance Authority (CMIA
The City has already invested considerable time in investigatin
this JPA and little, if any, additional work would be required.
It would appear that it is a good candidate for the City. The
second JPA is the San Diego Pooled Insurance Program Authority
(SANDPIPA).
points that are discu,ssed above.
This JPA appears to fit most of the positive profi
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