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- Michael Hammond
Forecasting Losses
One of the key financial decisions a governmental
risk pool must make each year is to determine the loss funding
contribution for the coming year. This contribution represents the amount
assumed by the pool to cover its
self-insured retention for all claims occurring that
year. It is based on projected losses.
For MVRMA, the loss fund contribution is usually the
largest component of the annual budget. In 2007, it was 60% of the total
premium billed to MVRMA members. Because it significantly impacts each
member's premium, it's important to understand the loss fund projection
process. Having greater insight about the risk financing of your claims
will provide a greater appreciation for what makes up your annual premium
contribution.
To assist in forecasting losses, an actuary is
contracted to prepare a loss funding analysis. An actuary combines
education, data and experience from many disciplines to arrive at the art
and science of his analyses. Actuaries have been called "financial
architects," who improve their clients' financial decision making. MVRMA
is fortunate to have partnered with the same actuarial firm since the
beginning of its program. Godbold, Malpere & Co. has the benefit of
understanding our exposures and losses over many years.
The actuary uses statistical modeling to predict a
range in which the actual losses may fall. You might compare the annual
loss funding analysis to far-ranging radar that scans what the future may
hold in terms of projected losses. In some respects, the actuary's role
might parallel that of a weather forecaster: both are tasked with
estimating something that will happen in the future; both rely on often
complex models that consider many variables; both examine long-term
patterns and trends and both know the future will not always behave as
predicted.
The actuary typically uses mathematical models to
create future scenarios using data from past years, while keeping an eye
on changes in present and future conditions that might affect the results.
Estimated ultimate incurred losses and exposures must be trended, or
adjusted for inflation, to today's dollars before the pure loss rates are
computed. Selecting the pure loss rates involves judgment. The actuary has
full access to historical data. But, subjective information pertaining to
changes in business operations, safety programs or other pertinent
conditions may affect the selected pure loss rates. For example, the
significance of a "bad" loss year in a pool's recent history may be viewed
differently by a trained actuary who has the ability to identify and
quantify patterns and recognize variables that may alter those patterns.
While the projected losses generally represent the
total losses we can expect for the upcoming policy year, it is important
to recognize the possibility that actual losses may exceed this amount.
From a statistical standpoint, the projected loss amount has a certain
probability of being correct. That probability, measured in a confidence
interval, is another piece of data that can help in making an informed
funding decision. Confidence intervals demonstrate how actual losses may
vary from the projection and enable us to assess the risk involved with
the selected loss funding amount.
For example, a 65% confidence level indicates the
funding amount will be adequate 65% of the time. And, 17.5% of the time it
will be greater than or less than the expected loss experience. Of course,
the higher the confidence level, the higher the required funding amount.
That's why enlisting the services of our actuarial consultant is essential
for forecasting future losses and deciding the appropriate amount.
Another important aspect of MVRMA's loss funding
process is its member ownership. Each member that participates in the
funding of a loss year retains its ownership interest in any remaining
funds, after all claims have been paid. These funds, which continue to
earn interest throughout their existence, are returned to the members in
the same proportion they were originally contributed. To date, MVRMA has
closed 12 of its 19 loss years and returned more than $4.1 million (nearly
48%) to the membership!
Determining the amount for the coming year's loss
fund is an important financial decision. It affects MVRMA's budget as well
as the budget for each of its members. Understanding the many facets of
the actuarial analysis and MVRMA's risk financing process enables one to
make wiser, more precise decisions about funding requirements.
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- Dinsmore &
Shohl
Changes to the "Pay to Play" Laws
On December 20, 2006, the Ohio General Assembly
passed House Bill 694 enacting significant changes to Ohio's "Pay-to-Play"
laws. The new law is effective April 2, 2007, but applies to campaign
contributions made on or after January 1, 2007. This article will address
some of the more significant changes to Ohio's "Pay-to-Play" laws and how
these changes will affect local government.
The new law contains a provision dealing with
appointed members of city councils, boards of county commissioners, boards
of township trustees and school boards. The previous law concerned
contributions to elected public officials who ultimately awarded public
contracts for goods and services. The new law provides that if a board,
commission, committee, council, etc...awards a contract, and the chief
executive officer appoints members of that entity, the law considers the
chief executive as the party responsible for awarding the contract.
Furthermore, House Bill 694 restricts the amount
political contributors, who currently have a contract with a government
entity or hope to be awarded a future contract, may contribute to a
political campaign. Individual owners of a contracting company are
permitted to make a campaign contribution of no more than $1,000 during a
two-year period. A government entity awarding a contract valued at $500 or
more, however, must consider the cumulative contributions made by business
owners, their spouses or children and any political action committee
affiliated with the business entity. If owners of a contracting company,
their spouses or children and/or affiliated political action committee
contribute a cumulative amount of more than $2,000 during a two-year
period, the government entity cannot award a contract to the company.
The new law also provides that once a contract has
been awarded, a contractor is prohibited from making a contribution of any
kind to the public official responsible for awarding the contract. The ban
begins on the date of the award and ends one year after the contract is
complete.
Additionally, the new law covers both non-bid and
competing bid contracts. A contracting company cannot be awarded a
contract when an individual owner of the company contributes over $1,000
(or if multiple owners contribute a cumulative amount of $2,000) to a
public official's campaign, even if the government official awarded the
contract through a competitive bid process.
Under the new law, collective bargaining agreements
with labor organizations representing employees are viewed as contracts
for the purchase of services. A labor organization is considered the
recipient of the contract and is treated similar to a business entity.
Thus, a member of the labor organization may only contribute $1,000 (a
cumulative amount of $2,000 for the entire organization). Additionally,
political organizations affiliated with a labor organization are also
included in the contribution limitations.
Finally, House Bill 694 prohibits a state
agency/department or political subdivision from entering into a public
contract with a contractor, unless the contract includes a certification
that the contractor is in compliance with the new law. The new law,
however, does not specify what must be contained in the certification.
The new law significantly impacts the way in which
political subdivisions award public contracts for goods and services. It
is, therefore, important that public officials become familiar with the
new law to ensure that their actions are appropriate.
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- Craig Blair
Some employees in our member cities think MVRMA just
buys the city's insurance and handles its claims. While these services are
an important part of what we do, there are other "value added services"
that accompany membership in MVRMA. One of these is the risk management
component.
In response to direction from the Risk Management
Committee, staff is now tracking and reporting to the Board the various
risk management requests they receive. The idea is to highlight the many
services MVRMA can provide.
An example of a frequent inquiry concerns the
liability associated with the use of member city parks or other
facilities. The city and its residents use city facilities for softball
and basketball leagues, festivals, craft shows, summer camps, etc. We
understand the use of city property is both good exposure for the city and
a benefit to its residents. But, it is important to keep liability for
such events to a minimum, and MVRMA staff is often asked to review the
"risk" involved with such exposures.
There are generally four types of event sponsor: (1)
the city itself, (2) non-profit organizations, (3) individuals and (4)
profit making groups. How you treat the exposure is related to the
category. The first category is the easiest to control because it will
have city employees involved in the set-up, running and clean-up of the
event. We assume the appropriate safety precautions have been taken but
will gladly review your plans when asked. Usually no fee is charged, but
if one is, the city may be held to a different standard of negligence, if
a loss occurs. MVRMA coverage would apply either way.
The city should have a policy in place detailing the
requirements for sponsors in the other categories. Before granting
permission, city staff should require an application from the sponsor
detailing the event. The staff must then determine if the facility
requested is adequate. Older buildings may not have sufficient electrical
capabilities or have enough accessible exits to accommodate the expected
crowd. The facility must be able to safely handle the traffic inside and
out, and the flow of participants must be free of obstructions.
Safety issues are just the first step. Secondly, the
city must insulate itself as much as possible from liability and exposure
to claims. The city should require a contract with the sponsor that
includes a hold harmless and indemnity clause. This means the sponsor will
be responsible for his acts of negligence. A certificate of insurance
naming the city "additional insured" should also be required. The
certificate provides proof of coverage, and the additional insured
language indicates the city will be protected by the sponsor's policy, if
a claim or lawsuit is filed.
MVRMA encourages your use of its "value added
services." If you need assistance with an upcoming special event, please
contact our office. Staff will gladly walk you through the process.
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-Starr Markworth 
MVRMA is venturing into the world of on-line
training. At its March meeting, the MVRMA Board authorized an agreement
with TargetSafety to provide FleetSMARTTM, an on-line driver training and
compliance program.
TargetSafety was established in 1999 to assist
clients in reducing their claims and losses using technology and
internet-based tools. It is the leading provider of internet based tools
for public entities and self insured risk pools. Currently, it is
providing services to more than 3,000 organizations across the country.
FleetSMARTTM is a web-based program designed to
assist organizations in reinforcing key driver safety concepts by
delivering driver specific training courses, assisting with the
development of organizational policies and procedures and tracking
critical compliance tasks. The goal of the FleetSMARTTM program is to
increase employee awareness of the risks associated with driving on the
job and to change unsafe behaviors.
Elements of the FleetSMARTTM program include:
Driver Training Curriculum -The
FleetSMARTTM driver training curriculum has been tailored to meet the
varied needs of drivers of four different types of vehicles: automobiles
and light trucks, passenger vans, large trucks and emergency vehicles. The
program is designed to deliver each driver two courses per quarter for a
total of eight per year.
Quick Reference Guide to Implementing a Fleet Safety
Program - This handbook provides an overview
of the elements of an effective fleet safety program and highlights how
FleetSMART'sTM training and tools can support your effort to implement an
effective fleet driver training program.
Policy and Procedure Templates -
FleetSMARTTM policy and procedure templates will help
you implement this key element of a Fleet Safety Program.
Task Templates -
FleetSMART'sTM task templates will help you manage and track key
requirements of a Fleet Safety Program, such as driver’s license renewals
and motor vehicle records checks.
Supervisory Curriculum -
The supervisory curriculum is designed to provide your
supervisors with the training necessary to maintain a staff of safe and
capable drivers.
For more information on MVRMA’s new on-line driver
training and compliance program, please contact Loss Control Manager Starr
Markworth at 937-438-8878 or by email at smarkworth@mvrma.com.
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Contents Appraisals
The appraisal methods for determining the value of a
municipal pool's contents, or personal property, are not particularly
accurate. As stated in our appraisal article last year, the appraisal
process is subjective. It is sometimes more of an art than a science and
can produce estimates with some degree of error. In the case of contents
or personal property appraisals, even with onsite inspections, it is
especially difficult to achieve an accurate result.
In MVRMA’s case, contents were historically
estimated as a flat percentage of the building value. When MVRMA
approached Alliant Appraisal Services to explore alternatives to this
approach, it was concluded that by changing the method from building value
to building area and occupancy, more accuracy would be achieved. As a
result of adopting the new approach, the overall amount of MVRMA's
contents was lowered substantially. The new values will produce a modest
premium reduction for the property renewal in July 2007.
We want to emphasize the change in the appraisal
methodology was done with the guidance of certified appraisers. More
importantly, if the change results in contents or personal property values
that are too low or underinsured at loss time, the MVRMA property policy
has sufficient limits and an Errors & Omissions clause that will allow the
loss to be paid to value.
Most property policies have clauses that impose
penalties in the event of underinsurance, however, MVRMA has been able to
procure a property policy that does not contain these clauses.
Under MVRMA's property policy, contents are valued
on a replacement cost basis, but the policy form only permits a
replacement cost adjustment when new contents are actually purchased. This
same provision also applies to building coverage. In other words, the
carrier will pay to replace the destroyed or damaged items with new ones
in the same kind and quality when repair is more expensive. With this type
of coverage, if the insured does not wish to replace destroyed or damaged
property, the policy will only permit an "actual cash value" or a
depreciated settlement. While "actual cash value" technically means
replacement cost minus depreciation, in reality, it is often times figured
by consulting second hand, used or resale markets. As a specific example,
a desk that was purchased in 1995 for $500 will be adjusted on a
replacement cost basis so that you can purchase a new desk, of similar
kind and quality, that costs $750 in 2007. If you do not wish to replace
the desk, the policy will only permit a depreciated settlement. An example
of a depreciated settlement might be the cost to purchase a 1995 desk, of
similar kind and quality, at a second hand office furniture store or
possibly on eBay. The depreciated amount is probably much less than your
original purchase price of $500. Depreciated settlements are typically
paid to the insured in cash.
An example of the adjustment process after a serious
loss would have the carrier paying a preliminary partial loss payment on a
depreciated basis while making additional replacement cost payments as
buildings are reconstructed and new contents are purchased. Note how
unimportant the original "purchase price" is to the entire process.
Obsolete property would be worth very little in an
insurance adjustment. Because the property is obsolete, it can not be
replaced and would have very little value on a depreciated basis.
The MVRMA property form provides coverage for
property on a replacement cost basis, however, if you are liable under a
contract for equipment, the terms of the contract will apply.
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