1998-1999 Insurance Program Renewal

The Corporate Services Committee recommends the adoption of the following report (March11, 1999) from the Chief Financial Officer and Treasurer, subject to the necessary funds being available in the 1999 Operating Budget:

Purpose:

The purpose of this report is to recommend renewal of the City's current property and casualty insurance policies for a further twelve month period at the expiring premiums, except for the Property policy which is at the expiring rate per property value.

Recommendations:

It is recommended that:

(1)property and casualty insurance policies insuring the City of Toronto be continued at their 1999 renewal dates at the same premiums as the expiring annual term, except for the Property insurance policy, which is at the expiring rate per property value; and

(2)a full marketing of all City of Toronto insurance policies be completed in preparation for the expiry of insurance policies in the year 2000.

Funding Sources, Financial Implications and Impact Statement:

The proposed annual premium cost of all City of Toronto property and casualty insurance policies renewing in 1999 is $4,173,852.00 which is the same cost as the expiring 1998 policies. The 1999insurance policy cost is subject to adjustments to the Property policy for increases or decreases to the overall insured value (plus applicable Provincial Sales Tax of eight percent where applicable). Funds have been requested in the 1999 Operating Budget for these costs.

Council Reference/Background/History:

The City of Toronto is currently insured under a consolidated insurance program resulting from extensive transition activities which took place between September, 1997 and May 1, 1998. AppendixI shows the insurance policies forming the consolidated insurance program along with the expiring premium and policy term.

Transition activities focused on harmonizing seven previously existing insurance programs utilizing a best practices approach. These activities included collection, review and analysis of information on the amalgamating municipalities to:

(i)familiarize insurers with the amalgamation process;

(ii)ensure that existing exposures were insured and create consistent coverages and limits under all former insurance programs until a consolidated program was arranged;

(iii)obtain the most favourable insurance quotations while minimizing premiums and retained costs; and

(iv)negotiate the broadest coverage at the most competitive terms.

Transition activities extracted components from all of the existing policies and coverages of the former municipalities to prepare for an extensive insurance marketing process which saw the placement of insurance for the new City of Toronto on May 1, 1998.

Transferring risk under an insurance policy is only one part of the City of Toronto's method of dealing with risk. The total cost of risk is made up of two main parts; premium and self absorbed losses. A review of historical loss patterns on a consolidated basis produced recommendations on the most appropriate levels of risk retention (self absorbed losses) and risk transfer (insurance) based on the new requirements of the City of Toronto.

Insurance claims costs which fall within the deductible portion of the insurance policies (retention level for absorbed losses) have been estimated at $10,985,000.00. Insurance claims costs which exceed deductible levels are paid by the City's insurers under insurance policies (transferred losses) which will cost the City $4,173,852.00 in 1999. The cost to fund the retention levels adopted by the City for absorbed losses represent 72.5percent of the City's total cost of risk. Therefore, the purchase of insurance policies to deal with transferred loss makes up 27.5percent of the City's total cost of risk.

Total Cost of Risk

(Self-absorbed vs Transferred)

The insurance marketing process conducted on behalf of the City approached 14 different insurers for quotations on casualty coverages required by the City (General Liability, Automobile, Medical Malpractice, Public Officials Errors and Omissions Liability), 21 insurers for Property insurance quotes and four Boiler and Machinery insurers. The City's current insurance program has resulted from analysis of the former insurance programs completed during the transition activities, and finalized after a thorough insurance market quotation process.

The transition and market quotation exercise resulted in a total cost of risk savings of $3,116,230.00 for the City. Much greater savings were realized purely on insurance policy premium costs. However, creation of a common deductible which is greater than what some former municipalities had, required a greater level of funding for self-absorbed losses. For example, the 1998-1999 total Property premium of $73,000.00 is 52 percent less than the combined premiums by the former municipalities in 1997. Similarly, the City's casualty insurance premiums of are 57percent less than the combined premiums paid by the municipalities in 1997.

Comments and/or Discussion and/or Justification:

The process of obtaining competitive insurance market quotations was completed less than one year ago. It was an extensive and thorough process that produced significant cost savings for the City. Since the placement of that coverage was completed on May1, 1998, the primary focus in the area of the City's insurance and risk management function has been on integration and amalgamation issues.

A cost of risk apportionment of 72.5 percent for self-absorbed losses requires the development of an internal support structure to administer such an insurance program. Staffing and further administrative development continued including operational and data base consolidations. On the basis of the City's cost of risk apportionment (i.e., 72.5 percent attributable to self-absorbed losses) it is evident that equal emphasis should be given to the development of supporting insurance and risk management administration within the City.

How the City manages and controls losses is critical as a significant portion of the City's total cost of risk is within its self assumed risk area. For example, if loss prevention reduces the self assumed losses for the City's general liability by only 20 percent the bottom line additional savings to the City could be in excess of $1.5 million annually. Since September, 1998 the Insurance and Risk Management Section has been focusing on developing systems and procedures in order to effectively implement risk management practices with the goal of achieving savings as noted above. It is anticipated that once such development is sufficiently advanced to produce updated current data for presentation to prospective insurers, a full marketing exercise will be undertaken. At this time the City's most recent marketing exercise is still very fresh. The current insurance marketplace is as stable as it was when the City marketed its insurance program less than one year ago, save and except for the implications relating to insurers imposing Year 2000 exclusionary language which appears to becoming non-negotiable at renewal time.

It is recommendation of this report that the City instructs incumbent insurers to renew their respective policies on the renewal date at the expiring premium amounts and the same premium rate for the Property policy. It is widely held that the City should pursue fostering its relationships with insurers rather than enter the insurance marketplace at this time.

Conclusions:

Insurance policy placements effective May 1, 1998, followed from detailed transition activity prior to amalgamation and an extensive competitive insurance market quotation process. Renewal of these policies for 1999 will ensure that the City continues to receive proper insurance coverage while allowing sufficient time for a comprehensive analysis and extensive marketing processes before the year 2000 insurance renewals. This can be achieved, with one relatively minor exception, at the premiums costs charged to the City in respect of 1998 coverages.

Contact Name:

Jeff Madeley, Manager, Insurance and Risk Management, Treasury and Financial Services, 392-630, E-mail: jmadeley@mtal.metrodesk.metrotor.on.ca.

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APPENDIX I