Risk Management Annual Report to the Audit and Insurance Committee Property and Liability Risk Financing Program Insurance Year

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1 A&I 12/19/14 Annual Report to the Audit and Insurance Committee Property and Liability Risk Financing Program Insurance Year The department coordinates the University s comprehensive property, liability and aviation insurance programs that combines the purchase of commercial coverage for protection against catastrophic loss and a self-insurance plan to cover selected deductibles, self-insured exposures, and operating expenses. The program covers University assets and activities system-wide. The major coverage is outlined below: Property o Insured through Factory Mutual Insurance Company The property program provides replacement cost coverage for buildings and contents Policy limit $1 billion per occurrence with no annual aggregate Per occurrence deductible is $250,000 A.M. Best financial strength rating of A+ Liability o Insured through United Educators The liability program provides a broad range of coverage including general, auto, professional, employment practices, directors and officers and other exposures. Catastrophic excess liability coverage limit of $40 million per occurrence and annual aggregate Catastrophic excess educator s legal liability/director s & officer s liability coverage limit of $25 million per occurrence and annual aggregate Per occurrence deductible is $2 million for the general liability exposure, educator s legal liability/director s & officer s liability insurance A.M. Best financial strength rating of A o Commercial crime and employee faithful performance of duties coverage provided by Fidelity and Deposit Company of Maryland (a Zurich company) Policy limits $11 million per occurrence with no annual aggregate Per occurrence deductible is $25,000 A.M. Best financial strength rating of A+ Aviation o Insured through QBE Insurance Corporation The aviation coverage provides aircraft liability and physical damage coverage as well as general liability coverage associated with ownership and operations of an airport Liability limit of $50 million (airport and turbine craft) and $25 million (piston craft) per occurrence with no annual aggregate limit Each claim physical damage deductible and annual aggregate deductible $250,000 A.M. Best financial strength rating of A 1

2 Program Financial Health The chart below provides the Primary Reserve Ratio for the last three years for operations. This ratio provides a snapshot of financial strength and flexibility by indicating how long the program resources could support expenses without relying on additional net assets generated by operations. Currently, the Fund has resources to operate for approximately nine months without additional operating assets. The minimum industry target range (indicated by the red bar), is 0.40 or five months Primary Reserve Ratio Balance Sheet Exhibit A (attached) shows a three year historical balance sheet for operations. The cash balance is down from previous years as a result of a combination of a spend down of cash balances through lowered internal recharge rates and a recharge rebate, along with higher than projected losses the past two years. Noncurrent liabilities reflect the expected liability associated with the losses currently on the books (Claims Pending) as well as an estimation of Claims Incurred But Not Reported (Claims IBNR). Both of these values are up versus the prior year. Statement of Income and Expense The financial activity of the operations over the last three years is illustrated in the following chart. Exhibit B is also attached which shows the Statement of Income and Expense for the operation. The most recent year concluded at a negative operating position of $2,672,472. Total revenue paid into the program decreased by approximately $1.5 million compared to the prior year. This decrease was associated with billing rate reductions and lower loss recoveries from commercial carriers. In addition, unanticipated large property losses incurred as a result of extreme winter weather, along with higher legal fees for complex claims contributed to this negative operating position. Purdue University Annual and Insurance Report 2

3 Summary of Financial Activity Premium Expenses Loss Expenses Other Expenses Total Revenue $6,793,661 $632,457 $887,433 $1,501,397 $799,212 $7,697,240 $6,205,541 $3,232,703 $3,917,014 $4,099,753 $4,248,905 $4,161, Actual Actual Actual Premium History The chart below represents the University s three year insurance premium payment history for premiums paid to underwriters. Total premium related expense decreased by approximately $100,000. This was due primarily to market conditions and negotiations with our insurance underwriters. Three Year Premiums Paid to Carriers Comparison Property Coverage Category Student Coverages Liability Aviation Other Coverages Other Coverages includes Fidelity/Crime and Physical Damage for autos and boats Premiums Paid Purdue University Annual and Insurance Report 3

4 Loss History The chart that follows shows the University s three year losses paid comparison, broken out by payments made by the Fund and losses paid by the carrier or underwriter. Three Year Losses Paid Comparison Property Property Property Coverage Category Liability Liability Liability Other Other Other Aviation Aviation Aviation RM Paid Carrier Paid Other includes Fidelity/Crime and Physical Damage for autos and boats. Amount Paid Loss Control Loss control and prevention services continue to be a major point of emphasis with, the University s brokers, and underwriters working with University departments and operations. Examples of risk management activities facilitated this past year include: Stewart Center received new fire panel installation and sprinklers. Storage of combustibles improved with the following loss potential mitigated: Harrison Hall, Hawkins Hall and Mollenkopf. Improved utility plant maintenance programs that included enabling low water cutoff devices in boiler number 2, electronic over speed devices on turbine generators 1 and 2 tested more frequently, and safety relief valve program implementation. The University s property insurer had expended approximately 1,017 engineering hours and 22 campus visits dedicated to loss mitigation and loss control recommendations. An additional 852 engineering hours were dedicated to complying with boiler inspections. Purdue University Annual and Insurance Report 4

5 Forward View of Plan Year Based upon the review of market conditions by and Aon Risk Services, the major lines of property, liability and aviation coverage remained with existing carriers for The property insurance was approved at the September 2014 Board of Trustees meeting with FM Global which included a 3.5 % rate reduction, coverage enhancements, and a membership credit of $241,262 resulting in a net reduction of $105,308 versus the prior year. Liability coverage with United Educators increased 2% for the year and aviation coverage with QBE Insurance Corporation remained competitively priced and at the same rates as the prior year. Purdue University Annual and Insurance Report 5

6 Exhibit A Balance Sheet September 30, 2014 September 30, 2013 September 30, 2012 Assets Current Assets Cash & Cash Equivalents $ 11,594,207 $ 13,990,026 $ 15,335,185 Accounts Receivable, net 23,374 19,243 12,940 Prepaid Expenses 222,273 (1,645) 75,280 Total Current Assets $ 11,839,854 $ 14,007,624 $ 15,423,405 Total Assets $ 11,839,854 $ 14,007,624 $ 15,423,405 Liabilities Current Liabilities Accounts Payable 620 6, Total Current Liabilities $ 620 $ 6,565 $ 833 Noncurrent Liabilities Claims Pending-Auto 151, ,769 72,127 Claims Pending-Liability 1,416,871 1,098,261 1,163,380 Claims Pending-Property 746, ,879 1,005,084 Claims Pending-Other Total Claims Pending $ 2,315,449 $ 1,926,909 $ 2,240,591 Claims IBNR-Auto 112, , ,730 Claims IBNR-Liability 2,310,695 1,815,594 1,767,940 Claims IBNR-Property 52,063 Total Claims Incurred but not Reported $ 2,475,712 $ 2,353,605 $ 2,175,670 Total Noncurrent Liabilities $ 4,791,161 $ 4,280,514 $ 4,416,261 Total Liabilities $ 4,791,781 $ 4,287,079 $ 4,417,094 Net Assets Total Net Assets $ 7,048,073 $ 9,720,545 $ 11,006,311 Total Liabilities & Net Assets $ 11,839,854 $ 14,007,624 $ 15,423,405 Purdue University Annual and Insurance Report 6

7 Exhibit B Statement of Income and Expense October 1, 2013 to October 1, 2012 to October 1, 2011 to September 30, 2014 September 30, 2013 September 30, 2012 Revenue Revenue Paid to the Program $ 5,506,573 $ 6,520,659 $ 6,199,751 Interest Earnings on Reserves 275, , ,165 Loss Recovery by Commercial Carriers 4, ,885 39,427 Third Party Recoveries 118,667 56,819 72,318 Internal Transfer (RM Grant Program) 300,000 Total Revenue $ 6,205,541 $ 7,697,240 $ 6,793,661 Expenses Premium Related Expenses Premiums Paid to Carriers 4,058,929 4,149,765 4,039,615 Broker Fees 102,858 99,140 60,138 Total Premium Related Expenses $ 4,161,787 $ 4,248,905 $ 4,099,753 Loss Related Expenses Losses Paid 2,178,753 2,671,937 1,717,645 Claim-Related Legal Fees 1,194, , ,293 Third-Party Administrator Expenses 33,210 27,390 37,810 Total Loss Related Expenses Paid $ 3,406,366 $ 3,368,451 $ 2,393,748 Claim Accrual Adjustment 510,648 (135,748) (1,506,314) Total Loss Related Expenses $ 3,917,014 $ 3,232,703 $ 887,434 Other Expenses Loss Control Program Expenses 64,305 61,623 66,976 Premium Rebate Expense - 750,000 RM Grant Program Expenses 165,097 Insurance Services Enterprise Expenses 569, , ,480 Total Other Expenses $ 799,212 $ 1,501,397 $ 632,456 Total Expenses 8,878,013 8,983,005 5,619,643 Net Change from Operations $ (2,672,472) $ (1,285,765) $ 1,174,018 Purdue University Annual and Insurance Report 7