EXCESS LIABILITY INSURANCE PROGRAM FOR OPERATIONS

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1 Metro Los Angeles County Metropolitan Transportation Authority One Gateway Plaza Los Angeles, CA gooiq I FINANCE AND BUDGET COMMITTEE JUNE 15,2011 SUBJECT: ACTION: EXCESS LIABILITY INSURANCE PROGRAM FOR OPERATIONS PURCHASE EXCESS LIABILITY INSURANCE RECOMMENDATION Authorize the Chief Executive Officer to negotiate and award excess liability insurance policies with up to $250 million in limits at a cost not to exceed $4.1 million for the 12 month period effective August 1, through July 31, See Attachment A, Option A. ISSUE Our excess liability insurance policies expire July 31, 201 I. Our insurance broker, Wells Fargo Insurance Services ("Wells"), is responsible for marketing the excess liability insurance program renewal to qualified insurance carriers. Quotes are currently being received from carriers with A.M. Best ratings indicative of acceptable financial soundness and ability to pay claims. Final premiums have not been determined and are still in negotiations with the carriers for the best and final rates. However, Wells advises us that our renewal premium may be higher than that of the previous year. Typically, we present a Receive and File report to the Board in June regarding the status of our negotiations with carriers. We then present final pricing and a recommended insurance program to the Board in July because many insurers will not hold final quotes for our August lst renewal date open long enough to accommodate the June Board schedule. The change in the Board meeting until August 4th, places the presumptive Board approval after the expiration of the current policies on August 1. In order to have no lapse in coverage, we are requesting Board approval in June for the nottoexceed amount of $4.1 million. Our not to exceed request reflects a conservative increase over the prior year premium paid because we have added the Union Station exposure and the Exposition Line exposure for this policy period, while adding $25.0 to $50.0 million in additional limits, partially offset by increasing our selfinsured retention ('SIR). DISCUSSION Excess liability coverage insures against losses resulting from bus and rail accidents, including bodily injury and property damage to third parties and passengers. The excess liability coverage also includes limited employment practices liability insurance, and errors and omissions coverage. Without this insurance, we would be exposed to

2 catastrophic operating losses from bus and rail accidents. We would also be violating certain contracts and agreements, such as salelleaseback and shared use agreements with railroads that require us to carry excess liability insurance at very high limits. Staff and Wells developed an excess liability insurance renewal strategy with several objectives for the policy year. Our first objective was to hold insurance premiums as flat as possible, given that new exposures have been and will be added over the course of the year such as Union Station and the Expo Line. Secondly, we wanted to continue to diversify our insurance carriers and promote competition for our risks globally. We have taken advantage of the soft insurance market over the last several years, reducing premiums from $5.4 million in to $3.8 million last policy year while adding $100.0 million in limits. We believe that small price increases, with the added exposures are likely and that the insurance marketplace is firming with further market hardening probable in the medium term. As an example, the Chief Executive Officer of Lloyds of London, Richard Ward issued the following statement to his underwriters within the last two months, "Rates should rise. Prices are dangerously low at present. Clients may think they are getting a bargain. But... the insurers who write unprofitable business are inevitably the first to collapse when disaster strikes."' One method to mitigate premium price pressure is to raise our selfinsured layer. Over at least the past 10 years, our SIR has remained constant at $ million, not growing with either medical cost inflation or general price increases. Over the course of this renewal, underwriters for insurance companies who had been willing to participate in the lead layer (i.e., the insurance layer just above our SIR) expressed reluctance and in some cases refused to participate unless our selfinsured limit increases. This message from underwriters and their actuaries was consistent and widespread. In order to address this concern of global insurers, we recommend increasing our selfinsured retention to $5.0 million and next year we will likely ask for additional increases. Moving to a $5.0 million SIR from a $ million SIR will save approximately $200,000 in premium for FY12. During the last 5 years, we do not believe we have any claims that will exceed our $ million SIR, so had we increased the retention during this period, savings would have resulted. In and , however, three significant claims would have resulted in additional selfinsured expenses of $1.0 million and two at $500,000 each, respectively. Looking out over the past ten years and not including inflationary growth, our expectation is that additional expected annual selfinsured losses, i.e., $2.0 million over 10 years, are roughly equivalent to the expected premium savings of $200,000. We are also requesting authority to add up to an additional $50 million in total limits, increasing total limits from $200 million to $250 million. The reason for the increase is to insure for full statutory limits, i.e., $200.0 million, loss on our rail system plus the legal and other allocated loss adjustment expenses that would be associated with such a grievous accident. Lift Rates or Risk Collapse, Lloyds' Chief Tells, Insurers, Guardian (UK), 5/17/2011 EXCESS LIABILITY INSURANCE PROGRAM FOR OPERATIONS 2

3 In Attachment A, we recommend Option A, which increases our SIR to $5.0 million with $250.0 million in coverage excess of our retention. Option B is the same as the expiring program and Option C keeps $250.0 million limits and increases the SIR even further. Attachment B shows the outline of the expiring program structure. FINANCIAL IMPACT The funding for eleven months of $3,758,333 million for this action is included in the FYI2 budget in cost center 0531, Risk Management Non Departmental Costs, under projects Rail Operations Blue Line, Rail Operations Green Line, Rail Operations Red Line, Gold Line, Rail Operations Expo Line, Metro Orange Line, Operations Transportation, Union Station, and Commuter Rail in account (Ins Prem For Gen Liability). The remaining month of premiums will be included in the FYI3 budget, cost center 0531, Risk Management Non Departmental Costs, under projects under projects Rail Operations Blue Line, Rail Operations Green Line, Rail Operations Red Line, Gold Line, Rail Operations Expo Line, Metro Orange Line, Operations Transportation, Union Station, and Commuter Rail in account (Ins Prem For Gen Liability). In FYI 1, an estimated $3.8 million will be expensed on this item. Should the full $4.1 million be required to purchase these policies, the proposed budgeted FYI2 amount for liability insurance will be insufficient by nearly $90,000. This potential shortfall can be offset by savings achieved in our property insurance renewal approved by the Board in April, which came in more than $200,000 below the FYI2 proposed budget. Impact to Budget The FYI2 fiscal year funding for this action will come from the Enterprise Fund for up to $3,708,333 and the General Fund for up to $50,000. No other sources of funds were considered for this activity because these are the funds that benefit from the insurance. This activity will slightly increase operating costs from the prior fiscal year. ALTERNATIVES CONSIDERED Various deductibles and limits of coverage options were considered as described in Attachment A. Our estimated penetration of the excess layer and premium history is also shown in this attachment. The recommended Option A secures a $5.0 million SIR per occurrence with $250.0 million in coverage excess of this retention. If we are unable to secure the full $250 million in insurance limits consistent with the authority delegated to the CEO of $4.1 million, we will attempt to procure at least $225.0 million. Attachment B shows the current year carriers selected and pricing. EXCESS LIABILITY INSURANCE PROGRAM FOR OPERATIONS 3

4 Another alternative would be to return to the Board in August with a ratification, already having placed the insurance. The recommendation for a conservative not to exceed amount avoids a ratification. NEXT STEPS Upon Board approval of this action, we will advise Wells Fargo to proceed with placement of the final excess liability insurance program to be determined by the final negotiated premiums effective August 1, ATTACHMENTS A. Options, Premiums and Loss History B Pricing and Carriers Prepared by: Greg Kildare, Executive Officer, Risk Management

5 ancial Services Officer & Treasurer Arthur T. Leahy Chief Executive Officer

6 OPTIONS, PREMIUMS AND LOSS HISTORY ATTACHMENT A CURRENT PROGRAM A OPTIONS (Estimated) B C SelfInsured Retention ($ millions) Limit of Coverage ($ millions) Not to Exceed Premium ($ millions) SelfInsured Retention ($ millions) Premium ($ millions) Claims in Excess of Retention Estimated Amount in Excess of Retention ($ millions) History of Excess Liability Policies by Policy Year (est.) unknown (est.) unknown (est.) unknown EXCESS LIABILITY INSURANCE PROGRAM

7 FINAL PRICING AND CARRIERS ATTACHMENT B LOS ANGELES COUNTY METROPOLITAN TRANSPORTATION AUTHORITY PRlMARYlEXCESS LIABILITY POLICY TERM: August 1,2010 to July 31, 2011 Total Limits $ 200,000,000 Total Premiums $3,814,599 EXCESS LIABILITY INSURANCE PROGRAM 7