MEMORANDUM

TO: Timothy Navarre, Assembly President

Members, Kenai Peninsula Borough Assembly

THRU: Dale Bagley, Mayor

FROM: Jeff Sinz, Finance Director

Colette Thompson, Borough Attorney

Todd Syverson, Assistant Superintendent

Gary Lamb, Risk Manager

DATE: September 26, 2002

SUBJECT: Ordinance 2002-19-20, appropriating $649,000 for the self-insured workers' compensation program

As discussed during the Policies and Procedures Committee meeting of September 17, 2002, the cost of workers' compensation has significantly increased. The Kenai Peninsula Borough received quotes reflecting increases of at least 300 percent over earlier rates when it solicited proposals last spring. This caused the risk management committee to reexamine funding workers' compensation through external insurance. To aid in the analysis, Willis and Company was hired to conduct an actuarial study to determine probable costs the borough would experience were it to self-insure workers' compensation and to compare those with the cost of acquiring external insurance.

The analysis supports hiring a third-party administrator and self-insuring for workers' compensation with excess coverage for any claim over $250,000. The actuarial study projected that losses would be approximately $818,000. However, this was admittedly a very conservative (high) figure due to a lack of clear data upon which to base the analysis. Assuming projected losses of $818,000, external insurance would cost between $950,000 and $1,331,309. To self-insure with a $250,000 self-insured retention, assuming actual losses of $818,000, the projected total cost is $1,149,000, which includes the following estimated expenses:

Estimated incurred losses @ 55% confidence level for remaining 9 months 613,000

Excess insurance @ $250K for 9 months 115,000

TPA Services (Ward North America) 36,000

Bridge coverage (7/1/02-9/30/02 with APEI) 295,000

State fee (2.4% at estimated loss level) 15,000

In-house claims management expense 75,000

Subtotal 1,149,000

Budgeted for FY03 -500,000

Difference 649,000

Please note that the bridge coverage is a one-time expense incurred to maintain coverage during this transition. Comparing the annual cost of the cheapest available external insurance of $950,000 against a normalized annual self-insurance cost of $1,059,000 would seem to indicate a continued potential for savings with external insurance. However, if self-insured losses run closer to the historical level of $550,000 rather than the actuarial projected level of $818,000, the actual annual cost of self-insurance would be $791,000, resulting in an annual savings of $159,000. An added benefit of the self-insurance program is that loss reserves would be kept by the borough instead of an external insurance company, enabling the borough to receive earned interest.

An integral part of this approach includes hiring an in-house claims management person who would oversee the third-party administrator to ensure that standard claims management practices are followed and to perform additional services as described in the resolution introduced on October 8, 2002. It is intended that the program will be closely monitored by the risk management committee and the risk manager Gary Lamb, as well as the program manager, to improve employee morale and simultaneously control costs.

An important element of this supplemental appropriation request is the source, available retained earnings within the borough's Insurance and Litigation internal service fund. This retained earnings balance, often referred to as the borough's loss and litigation fund, stood at $7,310,131 as of June 30, 2002. It is recommended that, on a one-time basis, this supplemental appropriation be funded directly from retained earnings without any resulting charge-back to user agencies or departments. At this point it is anticipated that all future costs be funded through charge-backs to the agencies and departments that benefit from the self-insurance program. Future charge-backs will be based on a combination of fixed costs recovered from all users and variable costs recovered based on historical benefits received. Any future subsidies from fund balance should be based on actuarial sufficiency of the insurance and litigation fund retained earnings balance.

Your support of this ordinance would be appreciated.