CR 05-162 Authorize Renewal of LOeague of MN Cities Insurance Trust Policy
December 20, 2005
Council Report 2005-162
AUTHORIZE RENEWAL OF THE
LEAGUE OF MINNESOTA CITIES INSURANCE TRUST POLICY
Proposed Action
Staff recommends adoption ofthe following: Move to renew the League of Minnesota Cities Insurance Trust
policv.
Adoption of this motion will result in staff moving forward with the proposed LMCIT insurance coverage. This
does not include medical insurance coverage.
Overview
Overall general liability rates will decrease 4%, property rates will decrease 3%, and auto liability rates will decrease
2%, auto physical damage will increase 2% and open meeting law will decrease 10%. Rates for all other coverage,
namely excess liability, boiler & machinery and petrofund remain the same. The rate changes are primarily driven by
changes in the Leagues loss experience. While rates do influence premiums, an individual city's actual premiums will
also be affected by changes in its expenditures, property values, payrolls, and other exposure measures and also by
changes in the city's experience rating. The insurance premium for Hopkins will increase approximately $17,200 or
10% over last year's premium for a total of$186,400. The primary reason for the increase is the result of higher
property values, and reserves for ongoing liability claims.
Overall, the liability and property loss picture doesn't look much different than it did a year ago, and the League isn't
seeing any new trends or alarming patterns. Liability loss costs, which make up about half of the property/casualty
total have been remarkable stable for the past few years. Actual loss costs at the LMCIT have been coming in below
projections. Property makes up about 1/3'd of the LMCIT loss cost. From 2003 forward property loss rates have been
low, in large part because the last three summers have produced very little storm loss.
Despite the stability, litigation relating to land use regulation and development continues to be a concern ofthe League.
Land use litigation costs average the League over $2 million a year - about 20% of the total liability loss cost - and
they can vary a great deal from year to year.
Finance continues to recommend the deductible amount of $20,000/$40,000 with $1,000 per occurrence after reaching
the maximum of $40,000. The current amount available in the insurance risk fund to cover deductible costs is
$124,112. In addition the LMCIT has declared a $12 million dollar dividend on the 2005 policy. Hopkins is projected
to receive $58,184. This will bring the Insurance Risk Fund total to $182,296.
Primary Issues to Consider
. Deductible amount
Staff Recommendation
Finance recommends renewal of the LMCIT Insurance Policy
Supporting Information
. Market Premium Summary
. LMCIT Memo
d~iZ14 '-~0~
Christine Harkess, CPA, CGFM
Finance Director
~inancial Impact: (approximatelv) $186,400 Budgeted: Yes Source: All fundsl
City of Hookins
Market Premium Summary
Coverages 2005-2006 lMCIT 2006-2007 lMCIT
Property $35,364 $39,462
Boiler & Machinery 5,878 6,198
Inland Marine 4,389 4,554
Employee Dishonesty 938 985
General Liability 83,737 92,162
No Fault Sewer
Commercial Auto 33,547 38,212
Subtotal $163,853 $181,573
Worker's Compensation
Volunteer AD&D 375 375
Petrofund 394 Included
Open Meeting Law 1,540 1,508
Facultative Reinsurance 2,759 2,952
Grand Total $168,921 $186,408
Notes and highlights:
1. Payment Plan: Direct Bill and Volunteer AD&D Coverage, Agency Bill
2. The above premiums include a Broker Commission of 10%.
3. Carriers
~ Admitted
~ Nonadmitted
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LMC
League of Minnesota Cities
Insurance Trust
1.45 University Avenue West, St Paul, MN 551.03-2044
(651) 281-1.200 . (800) 925-1122
Fax: (651.) 281.-1.298 . TDD: (651.) 281.-1.290
www.lmnc.org
Lzague of MlnnlUlota eiUu
Cities promoting excJ/rmoo
December 7, 2005
To: LMCIT Members and Agents
From: LMCIT Board of Trustees
Re: 2006 Property/Casualty and Workers' Compensation Rates and Dividend
Property/casualty rates for 2005-2006
Here are the premium rate changes LMCIT members will see at their next renewal. The
property/casualty rate changes apply to renewals on or after November 15,2005.
. Municipal liability rates will decrease 4%.
. Propeliy rates will decrease 3 %.
. Auto liability rates will decrease 2%.
. Auto physical damage will increase 2%
. Open meeting law defense will decrease 10%
There are no changes for excess liability, machinery breakdown, liquor liability, or bond rates
(minimum available bond coverage was increased from $25,000 to $50,000 without a rate
change). The rate changes are primarily driven by changes in loss experience. The decreases
listed above do not mean that your city's actual premium will necessarily decrease by the same
amounts. Although rates do indeed influence premiums, an individual city's actual premiums
will also be affected by changes in its expenditures, propeliy values, payrolls, and other exposure
measures, and also by changes in the city's experience rating.
Work comp rates for 2006
The Board voted to approve a 5% increase in work comp rates for 2006, and also to approve a
continuation of the 3 % credit for managed care. For the past two years, two main pattetns have
shaped LMCIT work camp costs. First, medical costs have continued to increase sharply, and
there is no sowld basis for predicting any kind of significant change in this trend. Medical
benefits have become the biggest single component of work camp costs, and now cost LMCIT
nearly twice as much as wage replacement benefits for lost time. Second, indemnity costs have
been stable and generally less than projections and have partially offset the increases in medical
costs.
AN EQUAL OPPORTUNITY/AFFIRMATIVE ACTION EMPLOYER
Dividends
Property/casualty program members will share a $12 million dividend this year. This is greater
than the $9 million amount we returned in 2002, 2003, and 2004. Attesting to a very successful
year of operations, it is indeed the largest dividend we've returned since 1997. As in the past,
we'll distribute the dividend in mid-December. The dividend formula will be the same as we've
used for several years. Under that formula, each city's share is proportionate to the difference
between the city's total earned premiums and total incurred losses for all years the city has been
a member, with large individual losses capped for purposes of the formula.
The work comp program will not return a dividend this year.
What's behind the rate changes?
Property/casualty
Overall, the liability and property loss picture doesn't look much different than it has in the
recent past, and we don't see any new trends or alarming patterns. Liability losses make up not
quite half of our total loss cost and have been remarkably stable for the past few years. Actual
loss costs have been coming in below our projections. Property makes up about a third of our
loss cost. Property losses tend to be more variable and are directly influenced by things like
storms, floods, and fires. From '03 on, property loss rates have been low, in large part because
the last three summers have produced very little storm loss.
Despite the stability, litigation relating to land use regulation and development continues to be a
concern. Land use litigation costs average over $2 million a year - about 20% of the total
liability loss cost - and they can vary a great deal from year to year.
There are a couple of other factors also contributing to our ability to reduce property/casualty
rates:
. While dollar loss costs have remained pretty stable, city expenditures have generally
continued to grow. In simplest of terms, this means that a relatively smaller percentage of
city dollars are needed to fund projected and actual losses. This enables a reduction in
premium rates.
. Last year, the LMCIT Board decided to significantly increase the amount of risk LMCIT
retains on liability claims, from $500,000 to $1,000,000 per OCCUlTence. We also increased
LMCIT's retention on property losses, but by a smaller proportion. Keeping more risk
means that we'll be paying more of the losses directly and that our loss costs will vary more
from year to year, but it also significantly reduces our reinsurance costs. In the long run, we
expect that the increased retention will produce a significant net savings for LMCIT
members. LMCIT's strong fund balance makes it possible to handle that variability, but it
may very well mean that cities will also see more variability in dividends from year to year
as well.
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Work camp
If tlllS section seems very familiar to what you read last year, the reason is that the news hasn't
changed much or gotten any better. The main factor driving the work camp rate increase for
2006 is once again rising medical costs. Medical costs for work camp injuries are projected to
continue increasing at a rate of about 9% a year. Medical costs now make up just about half of
work camp loss costs - about as much as indenmity benefits, Special Compensation FWld
assessments, and defense costs combined.
As noted above, our indemnity costs have been generally stable and less than projections. Willie
this is good and helps offset the increase in medical costs, we also need to keep an eye on injury
frequency. It was up vety slightly in 2004 and the first halfof2005. We don't know iftllis is a
blip on the radar screen or tlle beginning of a trend, but we will want to monitor it. Nonetheless,
we are able to keep our rate increase down to 5% - tlle smallest increase in four years - and this
modest increase also includes a small contingency maJ.'gin bnilt into the rates. Hopefully cities
can continue reducing the numbers of employee injuries; that's really the best tool we have to
control future premium costs.
Investment income rernains a very important elernent in the LMCIT work camp program, tllough
not quite as significant as it was a few years ago. Investment income now produces about a fifth
of the program's total revenue; a few years ago, it was over a third. Neveliheless, investment
income is still very important. Premiums alone would not quite cover projected losses, let alone
administrative and reinsurance costs.
How was the dividend amount determined?
Most LMCIT members are very familiar with LMCIT's approach to rate-setting. Briefly, the
premium rates incorporate a safety margin. That is, the premiums plus investment income aJ.-e
designed to produce enough revenue to cover losses and expenses even if losses turn out to be
greater than projections. If losses turn out to be at projections, that margin isn't needed to pay
for losses and is available either to be returned to members as a dividend or used to strengthen
LMCIT's fund balance. If losses turn out to be lower than projections, that additional savings
also becomes available to be returned to members.
One fact of life in any insurance operation is that it can take several years until claims are finally
settled and we know for sure what the actual loss costs were. For tllls reason, we have to work
with estimates, which are continually revised and updated, The program's results and the
amount of dividend we can return in anyone year therefore don't just depend on what happened
during that year; the year's finaJ.lcial results are also affected by changes in our estimates of what
prior year losses will ultimately cost.
Here's a summary of what makes this year's $12 rnillion dividend possible:
. The losses we incurred during the past year were lower than projected. They did not reach
into tlle safety margin or even use up all of the funds earmarked for loss payments.
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. The current estimate of what losses from prior years will ultimately cost is less than our
earlier projections. The nmds previously set aside for those losses are therefore freed up.
. Both earned premiums and investment income were sornewhat higher than projections.
The LMCIT Board also again used a small part of this year's net income to further strengthen the
program's fund balance. The Board concluded that this was appropriate in light of the continued
growth in the property/casualty program's premium volume and the increased amount of risk
LMCIT will now be retaining.
If you have any questions or comments, please feel free to contact Pete Tritz at the League
office, or any of the members of the LMCIT Board.
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