Agenda Packets - 1986/04/21 - Laserfiche WebLink

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remainingj;9Mo.(W Of the $6Iy11,ixXt of lability «overage. LMCIT retains I $250.000 and buys reinsurance to cover the remaining M is liability reinsurance n subject to a $1.000.O0(1 deductbk. Tut is, tale first few claims 10 exceed the f�`rf/•tom level will remain entirely LAICIT's responsibility. the reinsurers don't begun to pay unto tlx: total kisses in this excess layer exceed 81 rriilikm. LMLIr also purchases aggregate execs% reinsurance which begins lac pay if LMCIT'6 trial claims for t!w year exceed 1!0 percent of premm iu. LAICIT's member cities. act ,^g jointly. retain a substantial ayer of the citiesnsks. In lather words, through LMCIT, cities are able to handle a large share of their risks. so that their need to relc on the commercial nisur- awe imrkel is drastically reduced. Ar Jrxnaig LAI:IT isn't my rah raking ate chance that another city's losses will cost Its MMRIe"' �— 5'es, that s thie very nature of pooled self-insurance — sharing 9f nsk. How. ever. LMCIT's pricing, reinsurance, and reserving practices are such that itis unlikely that any coy' soil have to contribute any money in addition to its premium. This means the nsk that you will have to pay an assessnwnt because Of another city kisses a exlrenxdy small. The total losses of th,, group deter. mine whether surplus fund, ale avail- able for disttibut:on back to the member. In that sense, another city losses Ought mean the difference as to whether there is a surplus or nol, and thus whether there can be a dividend Or not Of course, other cities are taking the same nsk with respect to your losses. Note, though, that LMCIT's underwriters are fairly hard. nosed in looking at a cities IOss histOn'. A city with a consistent histoy Of lots of preventable losses will pay a corre- spendingly higher pr.mium than a city good with Ins- expenene. Our agent has gotten a quote from: pnvafe comipany whirh is cheaper than LMCIT', quote. If LMCIT rs a non- profit operation. how can a pnvale company' give a rheaoer nrk'e.' _ Several possible rcasuns for this exist. Either the private company's underwriter or LMlli s urwel%1iivr might have misjudged the nsk. Under- writing liability nsks involves a large degree of fudgement, and different p'o- pie may' judge differently. However LMCIT's underw•rit.ra have tar more exprnerxe on judging Mmnevita cilx•s fab7ity risks. and far nxrce data on Mu.ewa cities' lenses than anyone lathe, Anottxrr pit s9rbdmv is that the cover- xges are not comparable. I.MCrr's coverage forms incorporate a large number of features which broaden cov- eng,• to match ntics' particular needs, Thus. ' cu noted to Hoak: sure that vim are kwkmg at comparable coverage when comparing price. _ Another way insurance companies car. protde coverage more cheaply' in the first year is to wnle coverage on a •'calms -mark" basis. Ithat does "claims.made" mean' A claims -made policy covers only' those claims where 1) the incident ,or' ured after the coverage ukeptxm date, and 2) the chain takes place Juring the polky� period. An "occur- rence" policy. by contrast. would cover any incident occurring during the pdxy term. regardless of when stimr- one Makes the %arm. Labdmy coverage has a "long tall An indent may result in damage.. but the claim for those damages mail nit happen unW several years later. Thus. a claims -made policy would exclude many of the coons that LMCIT would cover under the "occurrence" form for general liability coverage - 01CIT's public officials' errors and cro ssrons coverage is on a claims- lode basis. as are almost all other par lic officals' policies.) An example nay clarify the differ- ence . Consider a claims -made for cand ei ocarrence policy, year 1986. Supple an incident Occurs which results in a loss. The occurrence pricey ll coin that incident. regard, less ofcaw'heiher someone flies a claim unmcdately or 20 years later. A claims -made plwy, by contrast, will cover the damages anmakes of incident orgy J the person claim during 1986, When the city renews the ciaims-made policy for 1987, the renewal policy will ty'px'aly cover claims made during 1987, provd- ing that the incident occurred no earlier than Jan. I. 1986, the uiception date o the original pulley. Each successiv plwy. then. will cover claims ansm alit of ."dents which happened aft: the original polky's 1986 inception Each successive renewal OI "claims made' pricey will cover nor and nwre claims. The first year can very cheap, since Orgy a fraction of t claims fur incidents during tat Year will actually he filed tie same year. I.MCIT's figures for 198f)oe 1 claims incurred that only 28 percent incurred that year were actually filed that year. This is a fairly typical pat- tern. In otlwi wards, when a rlaim%- made p hey replaces an occurrence Policy. the first -Near premium should be suniewhele in the neighborhood of a thud of the Cost of the comparable occurrence policy, Each successive renewal will be rrare"and s 0rre a pennd' hive, as the pOhry more claims, after perhaps five or sal years, lle costs should be quite close_ Soo. although claims made coverage may have an als' act-'en`ir difference in it its a very Significant coverage There is nothing wrong with claims - made coverage. %valid reasons exist for using cairn -made forms. It is a per- fectly good way tO cover risks — provided buyers understand what they are buying. it'c're in LA1C'IT and our insurance consultant sat'9 we can execs increase of two or three hundred per- cent for our next renewal. is this true.' No. This may be the consultant's best estimate of what commercial insurance rates are likely to do next year, but a consultant who its giving the city this advice hasn't asked LMCIT. LAICIT's rates prnbably won't change much tan renewal This is because of the crucial differences between LMCIT and commercial insurance compames. LMCIT's rates are now in the range where the loss experience suggests they should be. Cities should not expect another "shxk" increase in LMCIT rates at roe next renewal. In fart, we hop' to to cuk to discontinue charging the 10 percent reserve assessment upon renewal. One factor beyond LMCIT's control which could affect rates is the cost of reinsurance. However, by increasing the amount or nsk LMCIT retatof have been able 10 reduce the portion premium due to reinsurance costs. Even a nnajor mcrease in reinsurance costs would now have orgy a relatively f minor effect on the rates to individual : cites. g Of course_ this doesn't mean that no r city will see a major Increase in its n costs upon renewal. A city which shows a pattern of consistent. prevent• a aUie x.>5r5 .3^ exp^.'-'f ,n arP its prem- c min go up: the worse the "ny'su,s But lot• the more tlw premium will go p_ April 190