Government Management Committee. Deputy City Manager and Chief Financial Officer. P:\2011\Internal Services\Cf\Gm11013cf (AFS #13494)

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1 STAFF REPORT ACTION REQUIRED Insurance Program Renewal Date: April 13, 2011 To: From: Wards: Reference Number: Government Management Committee Deputy City Manager and Chief Financial Officer All P:\2011\Internal Services\Cf\Gm11013cf (AFS #13494) SUMMARY The purpose of this report is to: 1. Obtain Council authority to renew the City s property and casualty insurance policies effective June 1, 2011 for a one-year term and to delegate authority to the Deputy City Manager and Chief Financial Officer to renew subsequent annual insurance programs on each of June 1, 2012, 2013, and 2014 provided that the terms, conditions, limits, and deductibles are, in the opinion of the Deputy City Manager and Chief Financial Officer, substantially the same as are recommended in this report. 2. Provide management responses to the Auditor General's recommendations that pertain to the Insurance Renewal process. RECOMMENDATIONS The Deputy City Manager and Chief Financial Officer recommends that: 1. the City renew the following insurance policies effective June 1, 2011 for a period of twelve months: Insurance Policy Renewal Premium (excluding applicable taxes) Primary Liability: Comprehensive General Liability $90,000 Public Officials Errors & Omissions 90,000 Automobile 191,490 Garage Automobile 14,500 Medical Malpractice Liability 153,000 Staff Report for action on Insurance Program Renewal 1

2 Insurance Policy Renewal Premium ($ s) (excluding applicable taxes) Umbrella & Excess Liability: Primary Umbrella $815,000 1 st Excess Liability 556,000 2 nd Excess Liability 105,600 3 rd Excess Liability 226,800 4 th Excess Liability 128,520 5 th Excess Liability 115,000 Other Policies: Property $2,391,503 Boiler & Machinery 228,337 Crime 43,425 Aviation 24,590 Fiduciary Liability 38,000 Home Day Care Liability 48,500 Marine 207,496 ANNUAL COST $5,467,761 Less: FM Global membership credit $(239,150) TOTAL $5,228, Authority be delegated to the Deputy City Manager and Chief Financial Officer to renew the City's program of property and casualty insurance on an annual basis, during the duration of the current City Council term (June 1, , June 1, , and June 1, ) provided that the terms, conditions, limits, and deductibles are, in the opinion of the Deputy City Manager and Chief Financial Officer, substantially the same as are outlined in this report. 3. The City file an application with the Financial Services Commission of Ontario to obtain a license to undertake the business of insurance solely for the purpose of self-insuring coverage for Public Officials' Errors & Omissions, Commercial General Liability, and Automobile & Garage Automobile Insurance of up to $5 million per occurrence per coverage. 4. Approval for an amount of up to $100,000 to be made available from the City's Insurance Reserve (XR1010) for the retention of the appropriate legal expertise to assist with the application to the Financial Services Commission of Ontario for a license to undertake the business of insurance. 5. The appropriate City officials be authorized and directed to take the necessary action to give effect thereto. Financial Impact This report recommends renewal of the City s Primary & Excess Liability (i.e., Comprehensive General Liability, Public Officials Errors and Omissions, Automobile Staff Report for action on Insurance Program Renewal 2

3 and Garage Automobile), Medical Malpractice Liability, Property, Boiler & Machinery, Crime, Aviation, Fiduciary Liability, Home Day Care Liability and Marine insurance policies at an annual cost of $5,467,761 (less the one time Property insurance FM membership credit of $239,150) plus applicable taxes. This represents a decrease of $95,490 or 1.7% (before the one time Property insurance FM membership credit of $239,150) from the total premium of $5,563,251 paid for the expiring policies. Funding is provided from the City's Insurance Reserve Fund (XR1010) based on charges included in the 2011 Operating Budgets of City Programs and participating Agencies, Boards and Commissions plus contributions from the Non-Program Account. This will include a one-time cost to retain legal expertise to assist with the application for self insurance not to exceed $100,000. DECISION HISTORY The insurance policies were authorized through the Government Management Committee Meeting No. 23, Clause 12, approved by City Council at its Meeting on May 25, 26 and 27, 2009: Report - Request Authority for Insurance Program Renewal. ( In accordance with the Authority delegated to the Deputy City Manager and Chief Financial Officer, the City's insurance program of property and casualty insurance were renewed on terms, conditions, limits, and deductibles that were substantially the same as were recommended in the April 28, 2009 report. The renewal achieved a premium decrease of $158,029 or 2.7% from the premiums paid on the expiring policies and were competitive based on insurance markets. ISSUE BACKGROUND Authority is required to renew the City's Insurance Program at its expiry on June 1, 2011 and to delegate this authority to the Deputy City Manager and Chief Financial Officer to renew subsequent expiries on June 1st, 2012, 2013 and 2014 provided that the terms, conditions, limits, and deductibles are in the opinion of the Deputy City Manager and Chief Financial Officer substantially the same as recommended in this report. This will ensure that the City is adequately protected during the term of Council. City Council on July 6, 7 and 8, 2010, adopted Audit Committee Report AU17.2 (April 26, 2010) from the Auditor General, headed "Insurance and Risk Management Review" ( Appendix 1 - Insurance and Risk Management Review (February 22, 2010) ( Staff Report for action on Insurance Program Renewal 3

4 Appendix 2 - Management's Response ( Audit Committee AU17.2 contains 21 recommendations, four of which require reports to City Council. The management responses to the Auditor General's recommendations are addressed later in this report. COMMENTS Insurance Renewal The recommended insurance policies provide sufficient levels of financial protection for the City being $1,750,000,000 property insurance limit covering City buildings, facilities, contents, equipment, and an overall limit of $100,000,000 in liability insurance coverage (except $30,000,000 for Medical Malpractice Liability). The City is represented in the global insurance marketplace by international Insurance brokers Marsh Canada Limited (approved by the Bid Committee in November 2008), who report stable conditions in This report is recommending insurance policies at an annual cost of $5,467,761 (less the one time Property insurance FM membership credit of $239,150) plus applicable taxes. A further breakdown of the individual insurance policies and their respective premium are outlined in Attachment 1. This represents a decrease of $95,490 or 1.7% from the total premium of $5,563,251 paid for the expiring policies, as detailed in Attachment 2. Management Responses to Auditor General Recommendations The Auditor General's report of February 22, 2010 entitled, "Insurance & Risk Management Review" identified four recommendations pertaining to the Insurance Renewal Process. Below are these recommendations and management's responses: Recommendation #2 - The Director, Corporate Finance, in consultation with the City s insurance advisors, evaluate the risks and benefits of increasing the City s level of self insurance with the results of the evaluation reported to City Council. During the Insurance Renewal process, in addition to requesting premium quotations at the current $5 million self-insured retention, the insurers were requested to provide premium quotations for $10 million retention. The $10 million retention amount was recommended by the City's broker as lower amounts would not have produce significant premium savings. The tables below set out the savings quoted by the City s insurers to increase retentions as well as the resulting estimated increase in losses to be absorbed by the City. Staff Report for action on Insurance Program Renewal 4

5 Coverage Retention Change Cost Implications Recommendation Primary Liability General Liability, Public Officials Errors & Omissions, Automobile From $5,000,000 to $10,000,000 except Auto (insurer can only offer $5M retention/limit) Premium Savings: $561,722 versus Increased Costs Projected: $3,688,014 Historically, the City has had three claims with reserves in excess of the current $5M retention. Based on trends in court assessments and class action claims in Canada, the City's actuaries, Oliver Wyman, has estimated an average annual $3.7M increase in costs if the retention is increased to $10M. Increasing the retention would result in a projected $3,126,292 in net additional costs to the City. Therefore a change is not recommended. Coverage Medical Malpractice Retention Change From $5,000,000 to $10,000,000 Cost Implications Premium Savings: $30,600 Recommendation Increased Costs Projected: All historical claims are well below the current $5M retention. Payback analysis suggests it would take over 150 years of savings to make up for absorbing an additional $5M in risk. Maintain current retentions as payback is in excess of 150 years. No change is recommended given an unrealistic payback period. Coverage Crime Retention Change From $5,000,000 to $10,000,000 Cost Implications Premium Savings: $9,771 annually (versus annual premium of $43,425 at $5M retention). Recommendation Increased Costs Projected: All historical claims are well below the current $5M retention. Payback analysis suggests it would take over 500 years of savings to make up for absorbing an additional $5M in risk. Saving $10,000 annually does not justify assuming $5M in additional risk for each claim. No change is recommended given an unrealistic payback period. Coverage Property Retention Change From $5,000,000 to $10,000,000 Cost Implications Premium Savings: $219,104 Recommendation Increased Costs Projected: All historical claims are well below the current $5M retention. However, a new deductible aggregate was introduced last year which may generate claim payments of $100K to $200K which would not have been paid under a $10M retention. Maintain current retentions since payback is in excess of 20 years. Staff Report for action on Insurance Program Renewal 5

6 Payback analysis was performed by Marsh Canada and refers to the number of years times the annual premium savings for the increased retention to break even in the event of a loss. The City s current retentions appear to be at a level that balances risk and reward and no change is currently recommended. Increasing the City s retentions would yield savings that are unattractive in terms of magnitude or payback period. The worldwide insurance marketplace is in the midst of a continued soft market cycle as premiums have been declining since at least If this cycle changes and the market hardens (for example due to increasing worldwide reinsurance costs as a result of the Japanese tsunamis) then the City s premiums may increase and by increasing retentions the City may achieve more meaningful savings. Recommendation #3 - The Director, Corporate Finance, to review the possibilities of changing the current insurance fronting arrangement. Such a review to include consultation with staff of the Toronto Transit Commission. The Director, Corporate Finance also be requested to communicate the results of this review with the City's agencies, boards and commissions. The City self insures the first $5 million per occurrence of coverage for Public Officials' Errors & Omissions, Commercial General Liability, and Automobile & Garage Automobile Insurance. The liability insurance company ACE INA charges the City $394,500 each year to provide evidence of insurance for the City's self insured coverage (e.g., vehicle automobile liability pink slips) in exchange for meeting administrative needs. Further, the City must post collateral with the insurer, currently at $66 million in Government of Canada bonds, which is within the limit of $96 million approved by Council. If the City were to obtain its own license to be an insurance company, the annual fees would no longer have to be paid to ACE INA and collateral no longer posted. The TTC currently possesses a provincial license to operate its own insurance company. In discussions with the TTC, it was determined that the annual operating costs involved in running its insurance company are about $57,000 per year as follows: Actuarial Costs: $33,000 Audit Fees: $17,000 Vehicle Pink Slips and Miscellaneous Costs: $5,000 Insurance Association Membership Fees: $2,000 Were the City to establish a similar arrangement by securing a license, the City could easily absorb this function into its existing operations and as a result, there would be estimated net annual savings to the City of $337,500 per year. It is therefore being recommended that Council approve the filing of an application with the Financial Services Commission of Ontario to obtain a license to undertake the Staff Report for action on Insurance Program Renewal 6

7 business of insurance solely for the purpose of self-insuring coverage for Public Officials' Errors & Omissions, Commercial General Liability, and Automobile & Garage Automobile Insurance of up to $5 million per occurrence per coverage. It is further recommended that Council approve an amount of up to $100,000 to be funded from the City's Insurance Reserve (XR1010) for the retention of the appropriate legal expertise to assist with the application to FSCO. It is anticipated that the application process would be completed in time for next year's insurance renewal process. Depending on the outcome of this process, the appropriate authorizations will be sought. Recommendation #18 - The Director, Corporate Finance, to complete a comprehensive listing of properties and insured values for the 2011 insurance renewal process. A comprehensive listing of the City's properties and insured values were provided to City's brokers to assist with the 2011 property insurance renewal. Obtaining current replacement values for the City's insurable properties (building, equipment contents) is an ongoing process in which Insurance & Risk Management has been working with Accounting Division and Facilities Management. Recommendation # 19 - The Deputy City Manager and Chief Financial Officer to report at least once each term of Council on appropriate relevant information relating to significant uninsured risks. The following table summarizes the significant uninsured risks for which the City can not purchase insurance. These are primarily hazard risks (i.e. not financial or operational risks). Uninsured Risks Abuse Catastrophic Losses in excess of Insurance Policy Limits Employment Practices Liability Event Cancellation Example Abuse/molestation of persons in the City s care is excluded by the City s insurance program. To date, there has been no cost to the City for this exposure. Liability losses in excess of $100M Medical Malpractice losses in excess of $30M Property losses in excess of $1.75B Employee Dishonesty / Crime losses in excess of $15M In the event of a catastrophic loss, it is anticipated that relief funding would be available from the provincial and federal governments. Liability arising out of employment practices violations including failure to promote / grant tenure / enforce policies. Affected Divisions and Agencies are responsible for paying the damages. Costs, expenses, or lost revenues due to the cancellation, Staff Report for action on Insurance Program Renewal 7

8 Uninsured Risks Environmental Infrastructure including impacts of climate change Liability for Councillors sitting on Outside Boards Pandemic Example postponement or relocation of an event due to uncontrollable circumstances / disasters. This would have Budget Impacts on affected Divisions and Agencies. Clean up costs due to environmental damage at City properties. Liability arising out of pollution emanating from City operations Highly exposed divisions are aware of these risks and have established reserves (e.g. Toronto Water has the Water and Wastewater Stabilization Reserves) Damage to roads, bridges, sidewalks, curbs, piers, water and sewer systems, traffic signals, light poles, etc. is uninsured. (e.g. cost of by-pass for Coxwell Sewer or Finch Avenue road wash out) Replacement of Infrastructure is generally funded through the Capital Budget. The City s insurance program does not insure liability arising due to acts of councillors sitting on non City boards. The City's Indemnity Policy should respond to this claim. Increased costs to address a pandemic are not insured. In the event of a catastrophic loss, it is anticipated that relief funding would be available from the provincial and federal governments. CONTACT Len Brittain, Director, Corporate Finance Tel: (416) ; Fax: (416) ; lbrittai@toronto.ca Jeff Madeley, Manager, Insurance & Risk Management, Corporate Finance Tel: (416) ; Fax: (416) ; jmadeley@toronto.ca Deborah Blumentrath, Sr. Risk Management Analyst, Insurance & Risk Management, Corporate Finance; Tel: (416) ; Fax (416) ; dblument@toronto.ca SIGNATURE Cam Weldon Staff Report for action on Insurance Program Renewal 8

9 Deputy City Manager and Chief Financial Officer ATTACHMENTS Attachment 1 - June 1, 2011-May 31, 2012 Recommended Insurance Program Attachment 2 - June 1, 2010-May 31, 2011 Expiring Insurance Program Staff Report for action on Insurance Program Renewal 9

10 Attachment 1 June 1, 2011 May 31, 2012 Recommended Insurance Program Insurance Policies Insurer(s) Main Limit ($ S) Self Insured Retention / Deductible ($ S) June 1 st, 2011 Renewal Premium ($ S) Primary Liability: Comprehensive General Liability 5 million 5 million (4M deductible excess / 1M SIR) 90,000 Public Officials E & O Fronting Policies through ACE INA 5 million 5 million (4M deductible excess / 1M SIR) 90,000 Automobile 5 million 5 million 191,490 Garage Automobile 5 million 5 million 14,500 Medical Malpractice Liability Umbrella & Excess Liability: Lloyds of London led by Market form Syndicate 30 million 5 million 153,000 Primary Umbrella ACE INA 5 million Nil 815,000 1 st Excess Liability Lloyds of London through Elliot Special Risks 13 million Nil 556,000 2 nd Excess Liability GCAN 5 million Nil 105,600 3 rd Excess Liability Chartis 20 million Nil 226,800 4 th Excess Liability Travelers St. Paul 20 million Nil 128,520 5 th Excess Liability Other Policies: Property Lloyds of London QBE / ACE Factory Mutual Insurance Company 32 million Nil 115, billion 5 million 2,391,503 Boiler & Machinery Royal & Sun Alliance 100 million 200, ,337 Crime Aircraft Hull & Liability Chartis Insurance Company Allianz 10 million 5 million 43, million million Cessna-206H Non-Owned Aircraft Liability Allianz 10 million 1,000 Hull 24, baggage / 1,000 cargo Deductible Included Marine Hull & Machinery (Fleet 20) Subscription lead by ACE INA + others million for 20 vessels 5,000-35,000 Deductible 111,971 Marine Increased Value 6) (Fleet Lloyd s based Subscription 4.13 million for 6 vessels Not Applicable 8,480 Marine Replacement Tonnage (Fleet 8) Navigators Insurance Company 14.5 million for 8 vessels Not Applicable 24,540 Marine Protection & Indemnity Shipowners P&I Mutual Club (Luxembourg) US 500 million 1,000-5,000 Deductible 62,505 Fiduciary Liability Chubb Insurance 15 million 100,000 38,000 Home Day Care Liability Elliot Special Risks 2 million 1,000 Deductible 48,500 $5,467,761 plus applicable provincial tax GRAND TOTAL (less the one time Property insurance FM membership credit of $239,150) Staff Report for action on Insurance Program Renewal 10

11 Attachment 2 June 1, 2010 May 31, 2011 Expiring Insurance Program Insurance Policies Insurer(s) Main Limit ($ S) Self Insured Retention / Deductible ($ S) June 1 st, 2010 Renewal Premium ($ S) Primary Liability: Comprehensive General Liability 5 million 5 million (4M deductible excess / 1M SIR) 90,000 Public Officials E & O Fronting Policies through ACE INA 5 million 5 million (4M deductible excess / 1M SIR) Automobile 5 million 5 million 200,000 Garage Automobile 5 million 5 million 14,500 Medical Malpractice Liability Umbrella & Excess Liability: Lloyds of London led by Market form Syndicate 90, million 5 million 153,000 Primary Umbrella ACE INA 5 million Nil 850,000 1 st Excess Liability Various through Elliot Special Risks 13 million Nil 580,000 2 nd Excess Liability GCAN 5 million Nil 110,000 3 rd Excess Liability Commerce & Industry 20 million Nil 236,250 4 th Excess Liability St. Paul 20 million Nil 133,875 5 th Excess Liability Lloyds of London 32 million Nil 120,000 Other Policies: Property Factory Mutual Insurance Company 500 million $5M annual aggregate (portion of claim above $250,000 to erode the aggregate)/$250k deductible thereafter aggregate does not apply to Flood/Earthquake 2,391,503 Boiler & Machinery Royal & Sun Alliance 100 million 200, ,537 Crime Aircraft Hull & Liability Non-Owned Aircraft Liability American Home Assurance Company Allianz Insurance Company of Canada Allianz Insurance Company of Canada 10 million 5 million 45, million million Cessna-206H 1,000 Hull 24, million 1,000 Deductible included Marine Hull & Machinery (Fleet 20) Subscription lead by ACE INA + others million for 20 vessels 5,000-35,000 Deductible 111,971 Marine Increased Value 6) (Fleet Lloyd s based Subscription 4.14 million for 6 vessels Not Applicable 8,480 Marine Replacement Tonnage (Fleet 8) Navigators Insurance Company 14.5 million for 8 vessels Not Applicable 24,540 Marine Protection & Indemnity Shipowners P&I Mutual Club (Luxembourg) US 500 million 1,000-5,000 Deductible 62,505 Fiduciary Liability Chubb Insurance 15 million 100,000 39,500 Home Day Care Liability Elliot Special Risks 2 million 1,000 Deductible 50,000 GRAND TOTAL $5,563,251 plus applicable provincial tax Staff Report for action on Insurance Program Renewal 11