Agenda Packets - 1986/04/21 - Laserfiche WebLink

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is a board of trustees made uP of my offruls of parncipamng cities. If LMCIT's riarges are too high. to excess money be'bngs in the rates themi and to lbe stocklxokk-rs of an msuranc company. It also means that LMCIT is much uwire responsive to cities' needs than is a Convenlxmal insurance company. Some exampl"s of this responsiveness might be helpful Transit Casually. which was a ma)or writer of lability insurance for hus Imes, recentIv went bankruPt. leaving a number of cities suddenly wn0wwt coir•age for their trans'! ofirraoons_ Because of the shortness of time, these cities w•e:en't able to get cover- age in the private market for this specauzed risk. However. LMCIT was able on very short notice to provide the coverage these cities needed to keep their bus lines rumung, Similarly• LMCIT provided coverage on very shin notice to over 30 cares wow were soddenly kft without insurance when Iowa National collapsed. Another example involves a city which by conventional underwriting standards was simply uninsurable. largely because of circumstances beyond their control. LMCIT was able to develop a customized coverage form which made it it possible to provide coverage to this city without creating an undue risk to the other member cities. Had LMCIT not done so. the city would have sunply been heft with- out any coverage at all The whole purpose of LMCIT's existence is to provide Coverage to cotes. Unlike a private insurance com- pany. LMCIT is not going to simply decide some day to get out of the business of covering cities because there is more money to be nude vritmg some other kind of insurance. Didn't LMCIT in tact cause the current insurance crisis Gv undenrkmg coverage and driving conventional •aaeran'e companies out of the market' This is one of the more laughable suggestions we we heard. The crisis in insurance cost and avauabd0 h-gan in late 1984. At that time. LMCIT's propert!casualty' program covered about 2W cares and had annual reve- nues of about $2.5 million. The sugges- tion that this would give LMCIT enough economic leverage to run sev, enl multi -billion dollar internamonal insurance companies nut of the market is imaginative to say the least. Note tau that the enormous influx of cities into LMCIT occurred after LMCIT had implemented rate Increases. LMCIT now lovers over (0) cities for workers' compensation. and over 51xy for property and luabiht'. Nearly half of the those cities lavr entered LNICIT score rate inrr.ises nook effect in June 1985. Pucks. Minnesota cities are not the only ones having insurance problems. Problems in Minnesota countes are d anything worse than cities' insurance problems. Cities in other states, includ. ing stales without municipal pnalmg. are having similar problems. A Ken- tucky Municipal League survey of 2.5 cities showed that lability premiums in 1985 averaged 350 percent of the 19:t4 levels. Washington cities are facing increases of 300-700 percent The story is the same Inevery' slate Pn- vate sector businesses are being hid by similar problems; ask the owner of the local bowling alley about his insurance rates. Cities in Minnesota are in much better shape than arc many pnvate sector businesses or cities In other states- Minnesota cities have a source of coverage; many others are not so fortunate. .4favbe our tilt' should (W, about sell -insuring.' Rather than thinking of self-insurance as an either-or, we -do -or -we don't question, it might be more helpful to think In terms of how much risk your city can handle. Very few Minnesota cities are large enough to he able to consider self -insuring completely nit puny cities' budgets could absorb a sngle $600.000 IOWA) loss, let alone several such losses. Any prudent plan for self-bsurancc must consider the possibuity that the city could be faced with several shock losses in the course of a year, as unlikely as that possibility might seem. But nearly any citycan consider some level of party self-insurance. That's. nearly any city can benefit by retaining a certain amount of risk itself. This is not a new idea; Cities have bought property insurance subject to deductibles for years. Relativeh• few cities, though, have considered buying lability coverage subject to a deducti- ble. Obviously, the size of the deducti- ble must be geared to the size of the city — perhaps $500 In a smaller city. maybe 5.000 to $20.000 in a larger city. These deductibles can have a surprising effect on premiums. We've seen instances where a $5.000 deduct- ible reduced the premium by close to 25 percent. Of course, the reductici in premium is not all savings, since the roc 15 going to have some- aa'ms to pay Itself. The reason deducnbies work is fairly simple, You know the at will have a certain amount of losses. The entity to whom vow would lransler the rink, in this case LMCIT, knows that raa. Thereforethat person is grung to charge you the dollars necessan to pay those losses, plus overhead cos!s. By keeping those dollars and paying those claims yoorsehf, you avid Paying that overhead, and also have a chance to nuke a little investment income on those funds to hoot. You also benefit directly from anything you do to re&wr clams. The city shouldn't look at it as a yeo or -no. insure -or -self -insure decision; rather a whole range of posa'bilttles exist involving various ievels of Poten- tial savings and varous levels of risk to the city. It Is certairh• worthwhile. especially for medium- and large: -sue cities, to ask their agents to explore the possibiity of deductibles on all lines of coverage. It my atv isn't big enough to setl- insure on its Own• why couldn't we get together with some other cities and set( -inure tnger''er' This is an excellent suggestion. In fact, it s such a Rood idea we've already done it. It's called LMCIT. Perhaps it will help clarify ;rungs d we sketch out exactly how LMCIT works. Each mem'.er city pays a prem- ium to LMCIT. LMCIT (which is noth- ing more than a group of cities acting together) !hen agrees to pay' certain city losses. The funds LMCIT uses to Pay those losses are the pint property of the participating cities. LMCIT also has certain expenses. Because local agents offer the program those agents receive a commission. There is also the Cost of administering the program, and the cost of purchas- ing reinsurance. The funds remaWR after paying these expenses are used to pay the member cities' claims. LMCIT provides each city a $600.000 imit for liability coverage per occurrence. and up to $500.000 of property coverage. If the city 's prop- ettv values exceed that amount. LMCIT has an arrangement with the Travelers Insurance Company to pro- vide additional property coverage. LSICIT can also make available an additional $1 million of umbrella liability coverage. Of the $5o0.000 of property cover. age the program provides, LMCIT bears the risk for the frost "W-000. and purchases reinsurance to cover the