Report to: Committee of the Whole Date of Meeting: October 10, 2006

SUBJECT: 2007 General Insurance and Risk Management Program

PREPARED BY: Joel Lustig, Director of Financial and Client Services

Fred Rich, Business Analyst

RECOMMENDATION:

THAT the report dated October 10, 2006 entitled “2007 General Insurance and Risk Management Program” be received;

AND THAT the contract to provide General Insurance and Risk Management Program by Frank Cowan Company Limited be extended for an additional year for the period January 1, 2007 to December 31, 2007, for a total cost not to exceed $1,682,640 inclusive of PST (4% increase over the 2006 premium of $1,567,226 and the increased liability coverage $52,725);

AND THAT funding be provided for as follows:

$1,236,109 (2006 Budget $1,070,551 plus $165,558k phase-in) – 2007 Operating Budget
$ 62,689 (4% increase of the 2006 premium) to be pre-approved in the 2007 Operating Budget
$ 52,725 (Liability coverage increase from $10 to 15 million) to be pre-approved in the 2007 Operating Budget
The above will be funded from the corporate insurance accounts (840-846 5550, 5560, 5520, 5595, 5596)
$ 331,117 – unfunded to be included into the 2008/2009 budgets as phase-in III & IV of the 4 year phase-in for the insurance premium.

AND THAT the Director of Financial and Client Services be authorized to negotiate the 2007 contract for General Insurance and Risk Management Program with the Frank Cowan Company Limited provided that the premium increase does not exceed 4% of the 2006 insurance premium, exclusive of the increased liability coverage;

AND THAT the Director of Financial and Client Services be authorized to extend the contract for General Insurance and Risk Management Program for a further two years provided that it is the best interest of the Town and the premium increase does not exceed 5% of the previous years' insurance program, exclusive of annual coverage changes.

EXCUTIVE SUMMARY

In September 2005, Town Staff received a letter from Cowan estimating the 2006 insurance increase to be 15% and a potential increase in the Town’s liability deductible. The actual increase received in December was approximately 100% including premium and associated deductibles. After negotiating with Cowan, Town Staff were able to reduce the 2006 increase to approximately 80%. As a result of this 80% increase, the Budget Sub Committee authorized Town Staff to obtain quotes on the Town’s General Insurance and Risk Management requirements. Town staff contacted 11 municipalities about their insurer and their insurance program. All of the municipalities contacted had insurance coverage with either Cowan or with OMEX and the majority had experienced double digit insurance premium increases over the past few years. Town Staff also learned that one municipality had recently received a quote from the St. Paul Travelers Insurance Company.

Based on the information collected from municipalities, Town staff then obtained insurance quotes from OMEX and St. Paul. After completing a comprehensive comparison of the insurance coverages of Cowan, OMEX and St. Paul, Town Staff determined that the Cowan program was best suited to meet the Town’s insurance needs and that the Town should remain with Cowan for 2006.

In September 2006, Town Staff received a premium indication from Cowan anticipating the 2007 increase to be no more than 4%. Town Staff recommend extending the current contract with Cowan for the 2007 policy year, provided that the premium increase is not more than 4% of the 2006 insurance program, exclusive of the increased liability coverage. If Cowan’s 2007 renewal premium is higher than 4%, Cowan has offered the Town a 90 day cancellation period on the 2007 renewal and Town Staff will consider issuing an RFP for the 2007 General Insurance and Risk Management Program.

FINANCIAL CONSIDERATIONS:

In 2005 the cost of the insurance program with Frank Cowan Company (Cowan) was $868,974 (including PST). The initial quote for 2006 was $1,735,780; an approximate 100% increase. After negotiating with Cowan, the 2006 premium was lowered to $1,567,226, a reduction of $168,554 which still represented a 80.4% increase over the 2005 premium.

The corresponding increase in the premium and deductibles budgets for 2006 was $902,000 ($662,233 due to higher premiums and $239,767 for an increase in the deductibles). Due to budget constraints, the Budget Sub-Committee approved a four-year phase in of the $902,000 or $225,500 per year.

The 2006 budget shortfall of $496,675 will be funded from other operating surpluses, if available, or the Insurance Reserve, if required.

1. Purpose 2. Background 3. Discussion 4. Financial 5. Environmental

6. Accessibility 7.Engage^21st 8. Affected Units 9. Attachment(s)

To provide Council an update regarding the 2006 General Insurance and Risk Management Program alternatives and options and obtain authorization to negotiate the 2007 program with the Frank Cowan Company Limited.

BACKGROUND:

The Frank Cowan Company Limited (Cowan) has provided the Town’s insurance coverage for over 40 years. In 2003 Council approved a one year contract extension with Cowan for the General Insurance and Risk Management Program. In addition, Council authorized the Director of Financial and Client Services to extend the contract for a further two years, 2005 & 2006, provided that the premium increase did not exceed 8% of the previous years’ insurance program. The premium increase for 2005 was 8.1% and included new assets added to the coverage such as the Angus Glen Community Centre & Library and additional fleet vehicles.

In the fall of each year, Cowan has historically provided the Town with a verbal update on the anticipated percentage increase in the premium for the following year. In September 2005, Cowan advised the Town that the 2006 premium increase would be 15% and that there may be a potential increase to the Town’s deductible from $10,000 to $25,000 for Liability and Errors and Omissions coverages. Based on this information, Town included a 15% insurance increase into the preliminary 2006 operating budget.

On December 13, 2005 the Cowan renewal represented an approximate 80% premium increase (2006 vs. 2005) and a deductible increase to $50,000 for Liability and Errors and Omissions coverages. The reasons provided by Cowan for the increase were, continuing poor loss experience with both an increase in frequency and severity of claims against Public Entities and that the Town’s premium had been understated for the last few years. (See attached letter dated December 14, 2005 entitled “Market Conditions Report” email, (Appendix “B”).

Staff informed the Budget Sub-Committee of the substantial premium and deductible increase and the Budget Sub-Committee approved the phase-in of the insurance increase over a four year period. Staff further advised the Budget Sub-Committee that discussions had and would continue to take place with other municipalities and other insurers. Also, the Committee was advised that a report to General Committee would be prepared in 2006 on the insurance alternatives and options available.

At the end of 2005 and the beginning of 2006, Town Staff contacted 11 municipalities, (Vaughan, Hamilton, Richmond Hill, Welland, Newmarket, Fort Erie, Thorold, Mississauga, London, York Region and Brampton), about their insurer and insurance program. At that time, all of the municipalities contacted had insurance coverage with either the Frank Cowan Company Limited or with the Ontario Municipal Insurance Exchange (OMEX)[1]. In addition, a majority of the municipalities contacted have experienced double digit insurance premium increases over the past few years and have recently undergone their own analysis of the municipal insurance market.

Due to time constraints and based on research that indicated only two insurance companies in the Ontario Municipal insurance market, a Request For Proposal (RFP) was not issued and the Town contacted OMEX directly to obtain an insurance quote. The Town also engaged RiskPro Risk Management Consulting (RiskPro) to review and compare the OMEX insurance quote and policy wordings with the Cowan policy. RiskPro is a member of Risk Management Consultants of Ontario and is regarded as an expert in municipal insurance programs. RiskPro has also performed the same analysis on a previous Town insurance RFP and has been hired by many other municipalities throughout Ontario in the past.

In March 2006, as OMEX was developing the Town’s quote, OMEX contacted a broker, BFL Canada (BFL), to provide a quote on a portion of the Town insurance requirements. Through the Town’s current affiliation with BFL (the current provider of the SportsCan User group Insurance program), BFL contacted the Town expressing an interest to quote on the Town’s full insurance requirements. BFL informed Town staff that the St. Paul Travelers Insurance Company (St. Paul) and Zurich Insurance may be interested in quoting on the Town’s insurance needs and that St. Paul had quoted on Mississauga’s insurance requirements. As a result, BFL also prepared a quote for the Town’s insurance needs.

BFL Canada, Cowan and RiskPro all agreed that there are currently four competitors in the Ontario municipal insurance market: Frank Cowan Company Limited, OMEX, St. Paul, and Zurich Insurance. The insurance broker BFL provided a quote from St. Paul and confirmed that Zurich would not be providing a quote for Markham’s insurance business, as Zurich mainly insures smaller municipalities, e.g. less than 50,000 people.

The remainder of this report compares the premium, risk, and coverage provided by the three companies: Cowan, OMEX, and St. Paul.

OPTIONS/ DISCUSSION:

1) Premium Comparison

The insurance premium paid to Cowan for 2006 was $1,567,225.96 (inclusive of PST where applicable). Although there are differences in the various policies, a comparable policy from OMEX and St. Paul carry a premium of $1,088,373.78 and $1,211,635.12 respectively. Differences in coverage, deductibles, etc. between the policies are discussed in the following sections.

Based only on the premiums, there is a $478,852.18 (or 30.6%) savings if the Town switches insurance providers, from Cowan to OMEX ($1,567,225.96 - $1,088,373.78). Similarly, based just on the quoted premiums, switching from Cowan to St. Paul would yield projected savings of $355,590.84 ($1,567,225.96 - $1,211,635.12) or 23%. RiskPro recommends considering reciprocal insurance only when the savings are approximately 20% or greater. Based on the above calculations, both OMEX and St. Paul were further considered by Town Staff.

2006 SAVINGS

The difference in premiums does not translate to absolute savings for the Town. There is a penalty for switching insurance companies during the year called a short-rate cancellation fee. The short-rate cancellation fee, estimated at $163,137 (based on June 1, 2006), would be deducted from the return of premium, from Cowan, if it switched to either OMEX or St. Paul in 2006.

In addition, OMEX requires that all municipalities obtain appraisals on property (at the municipality’s own expense) and sign statement of values in order to determine premiums and define the property payouts, if required. For the purposes of comparing the cost of Cowan to OMEX in 2006, the cost of appraisals should be considered. The chart below adjusts the savings to the Town to account for the short-rate cancellation fee, $163,137, and appraisal costs, estimated at $150,000 (based on $1,000 per appraisal multiplied by the Town’s 150 facilities).

ANNUALIZED SAVINGS

The short-rate cancellation fee is a one-time fee, should the Town have considered switching insurance providers in 2006. On an annualized basis, however, the OMEX policy requires all members to perform appraisals on property. Since OMEX just implemented this requirement in 2006, they are uncertain whether appraisals will be required each year or if each member may rotate the appraisal of properties each year (e.g. 1/2 of the Town’s properties each year).

Assuming the 2006 quoted premiums, annualized savings are as follows:

* - Assumes that on an annual basis OMEX will require that each municipalities appraise half of their property (e.g. ½ of the $150,000 of appraisal costs estimated for the Town of Markham).

As explained in the next section, it is anticipated that conventional insurance premiums will continue to fluctuate based on the insurance industry & the Town’s claim history. Also, reciprocal insurance premiums are anticipated to fluctuate based on the claims history of all members of the reciprocal. For the purposes of this analysis, the premiums were kept at the 2006 levels.

2) Conventional vs. Reciprocal Insurance

Cowan is a conventional insurer, which means that a premium is paid in exchange for a promise to pay claims (as defined in the policy), should any occur during the coverage period. Generally poor claims experience or insurance industry downturns affects future premiums.

OMEX is a reciprocal insurance company, which means that various groups come together to spread the risks and losses by charging an amount against each member of the group. Under reciprocal insurance, the Town is directly impacted by settlement of claims related to other municipalities in the reciprocal. In addition, should the Town choose to terminate its membership in the reciprocal insurance group, in the future, it could still be liable for retroactive reassessments of settlements for claims that originated while the Town was still a member. That is, claims may take several years to settle but OMEX will assess each member of the reciprocal group for the payment of the claim based on the members of the group when the original claim was made.

While there are advantages and disadvantages for conventional and reciprocal insurance, one of the most important points is that the decision about whether or not to join a reciprocal should not be taken lightly as it is a major philosophical change for the Town. The decision should not be viewed as simply an insurance alternative or solution for one or two years. Accepting the OMEX proposal and joining the reciprocal should be a conscious long-term commitment.

Members of the reciprocal are not totally shielded by insurance industry pressures. According to RiskPro, OMEX self-insures a portion of their liability and then re-insures the balance through conventional insurance (e.g. OMEX self-insures the first $1.8M of all liability claims and re-insures the balance through the conventional insurance marketplace).

3) Major Coverage Differences

LIABILITY LIMITS

In this category, OMEX provides the highest amount of coverage at $50M, followed by St. Paul at $20M, and then Cowan at $10M. The liability limits are per occurrence (e.g. each claim is limited to $50M, $20M & $10M respectively).

PROPERTY

Property coverage associated with the Cowan and St. Paul program is provided on a blanket basis and not limited to the individual property replacement costs as with the OMEX program. All claims are subject to the deductible which is the same for all three providers.

Under the OMEX program, statement of values for each property (based on appraisals) are signed by the municipality. A claim on the property is limited to 125% of the stated value. There is significant exposure for municipalities if the actual cost to replace the property exceeds 125% of the stated value.

Under the Cowan and St. Paul blanket program, the replacement of property is limited to the total stated values of all the properties (currently at $228M). This means that if the actual replacement/reconstruction cost of one property exceeds the stated value, the cost would still be paid by Cowan or St. Paul as long as it did not exceed the $228M.

This is a major difference in the OMEX policy and potential financial risk to the Town that should be considered when deciding on an alternative insurance provider.

AUTOMOBILE

Automobile coverage associated with Cowan is full replacement cost of all vehicles in the event of a total loss. OMEX uses Agreed Value of Automobiles which are determined prior to a loss and OMEX will pay up to the value indicated for an insured loss. The St. Paul coverage is similar to that of Cowan (e.g. full replacement), however, it only applies to non-fire vehicles less than 5 years old and fire apparatus, as defined in the policy, less than 10 years old. Vehicles older than these predetermined limits are paid based on actual cash value (market value).

Based on the age of the Town’s existing fleet in 2006, it is projected that the financial exposure to the Town is $3.4M for total losses of non-fire vehicles older than 5 years ($0.9M) and fire vehicles older than 10 years ($2.5M). This exposure would change from year-to-year as aging vehicles are replaced or the planned replacement deferred.

EXCESS BOND

The Town’s current insurance policy provides coverage for excess bond which extends the limit on crime coverage from $1M to $10M. This coverage was matched by St. Paul but with a deductible of $5,000 (currently, no deductible with Cowan). This coverage, however, is not available through OMEX so crime coverage under the OMEX policy is limited to $1M.

4) Occurrence vs. Claims-made

Currently, the Town’s Municipal Liability insurance policy is written on an occurrence form. Essentially, this means that the insurer in place at the time that the incident occurred would be the one that responds to the eventual claim, despite when the claim or civil lawsuit is actually initiated.

Under a claims-made policy, such as the Town’s Environmental Liability policy, the insurer responds to claims made or initiated during that policy period. Generally, a claims-made policy is necessary when it is difficult to determine the exact date that an incident occurred resulting in the damages or loss suffered by a third party. The Environmental Liability policy is a good example of this as it often deals with claims in which the damage was sustained unknowingly and slowly over many years.

Under the St. Paul program, all employment-related claims are included in the Errors and Omissions policy, which is a claims-made policy, with an aggregate limit of only $250,000. Currently, the Town has these exposures covered on an occurrence form with a $10M limit and no aggregate limit.

The St. Paul policy also provides Sexual Abuse coverage for the entity and certain other protected persons on a claims-made policy with an aggregate limit of $1M. Currently, the Town has this exposure covered on an occurrence form with a $10M limit and no aggregate limit.

Changing coverage from an occurrence form to a claims-made basis is generally for the benefit of the underwriter or insurance company. Generally, changing to a claims-made form, with aggregates, should result in a substantially lower premium (especially in the first few years). This is because the new insurer will likely not be faced with any new claims from these exposures for many years, as the occurrence-based policy purchased in previous years would likely respond. In other words, the new insurer would be able to severely reduce their costs for these exposures knowing that it has a minimal risk in this regard. As outlined in the premium section, the St. Paul premium, for 2006, is $355,591 (or 23%) lower than the 2006 Cowan premium.

Should the Town decide to switch to St. Paul, a program to build-up the Insurance reserve may be required in order to mitigate the higher risks due to lower limits and aggregates on the coverages summarized above.

In addition, should the Town decide to switch back to an occurrence form policy/ insurance providers in the future, actual claims made after the switch where the incident occurred during the time the Town was insured with St. Paul would not be covered. This means that the Town would pay for these claims out of its own reserves or acquire additional insurance, referred to as “tail coverage” to extended reporting period and pick up the claims reported after the expiry of the claims-made policies. The number of years “tail coverage” is required is at the discretion of a municipality given that claims may be filed several years after the incident.

Conclusion

OMEX

During the course of the insurance review, OMEX members were assessed with a supplementary assessment for unfunded insurance liabilities, for the period 1998-2005. Based on discussion with other municipalities and Council reports, the reassessment payments to OMEX have been as high as 32% of the total premiums paid during the 1998-2005 period. In Addition, some OMEX members have been quoted double digit insurance premium increases for the 2006/2007 policy year.

If the Town were to switch to OMEX, it is recommended that a strategy to build-up the Town’s Insurance reserve be developed in order to mitigate potential future liabilities associated with reciprocal insurance overall.

Based on the philosophical change and the recent supplementary assessment Town Staff do not recommend considering switching to OMEX at this point in time.

St. Paul

Based on the above significant coverage differences RiskPro recommends that the Town not consider the proposal provided from BFL Canada. According to RiskPro the Liability and Errors and Omissions coverages provided by Cowan and OMEX are more comprehensive to that provided in the BFL proposal.

To make the St. Paul coverages competitive with the Cowan coverages, BFL Canada has forwarded improved policy wordings and coverage changes to the St. Paul insurance company for consideration.

Although 3 Municipalities in Ontario are currently insured through St. Paul (Mississauga, St. Catharines and Port Colborne) it is the opinion of Risk Pro not to consider the St. Paul product until such time that the policy wordings are improved.

Cowan

The 2006 Cowan premium represents approximately 80% increase over the 2005 expired premium; however the quotes provided by OMEX and BFL represent up to a 40%, increase over the 2005 expired Cowan premium. This provides credence to the Cowan comment, that the Town’s premium has been somewhat understated for the last few years. Therefore the real increase comparison would be between the $1,088,374 (the lowest quote from OMEX) and the Cowan 2006 premium of $1,567,226 or a 43.9% increase.

During the time Staff were receiving quotes from OMEX and BFL, Cowan developed an enhanced Risk Management program. This program has been included into the Town’s current Cowan program at no additional cost. The program includes the following

A comprehensive risk audit of all major corporate services provided by the Town including policies, procedures and methods
Develop a Risk Management policy and procedures manual and help establish a Risk Management committee
Cowan Loss Control Inspectors will inspect a least 10 of the Town’s major facilities and at least 10 of the largest play structures and provide detailed Risk Management reports, including a hazard report, for each inspection
Eight Risk Management training courses including, Managing Roads & Sidewalks, Municipal Alcohol/Special Event policies, Outdoor Winter Recreation Activities and Volunteer Training.
Examine contracts and leases with respect to corporate liability or insurance requirements
Establish insurance requirements to be imposed upon contractors in conjunction with respective departments and develop an automated centralized insurance certificate registry system.
Review and analyze claims data to determine frequency of claims by type or department in order to determine the effectiveness of existing policies or procedures.

This Risk Management Program is a value added service Cowan is providing to help minimize the Town’s claims loss ratio and therefore help minimize future premium increases.

Liability Coverage

As part of the Municipal survey, staff collected information on liability coverages and deductibles. From this information, Staff determined that Municipalities of similar size, and some smaller in size, have liability coverages of at least $15 million compared to the Town’s current $10 million coverage. Staff then had discussions with Cowan regarding the Town’s current liability coverages and recent changes in the awards being handed down by the courts. Cowan confirmed that the Town’s liability coverages are low in comparison to other municipalities of similar population and some significantly smaller in population. Cowan also provided some Southern Ontario examples of recent judgements in the $10 million range. Based on the increasing value of awards being handed down by the courts, Cowan recommends liability coverage of $25 million; however they provided the following liability increase options:

Understanding that recent judgements have been in the $10 million range, Municipalities of similar size have increased liability coverages, and due to current financial constraints, Staff recommend increasing the Town’s liability coverage from $10 million to $15 million, at a cost of $52,725 (including PST).

Recommendation for 2007

September 2006, the President of Cowan has provided a letter to the Town indicating Cowan anticipates that the Town’s 2007 insurance program costs will not increase by more than 4%. Based on the understanding of the options discussed and the recommendations of RiskPro, Town Staff recommend continuing with Cowan for the 2007 policy year.

It is anticipated that Cowan will provide the Town with a formal quote in December. If the 2007 renewal premium is higher than the stated 4%, exclusive of the increased liability coverage, Town Staff will consider issuing an RFP for the 2007 policy year. As mentioned in the Financial Considerations section of this report, Cowan has offered the Town a 90 day cancellation period on their 2007 renewal on a prorata basis in the event that the terms change. The 90 day cancellation period would ensure that the Town has enough time to issue and award an RFP without incurring a short-rate cancellation fee as associated with the 2006 policy.

Staff recommend extending the contract with Cowan into 2008 and 2009 provided that the premium increase does not exceed 5.0% of the previous year’s insurance program. However, staff will continue to monitor the insurance market to determine the best course of action which may include obtaining a competitive quote through the RFP process.

RECOMMENDED

BY: ________________________ ______________________

Andy Taylor Barb Cribbett,

Commissioner of Corporate Services Treasurer

ATTACHMENTS:

[1] Mississauga has since switched their insurance from Cowan to the St. Paul Travelers (St. Paul) insurance company. St. Paul is not new to the insurance industry but has re-entered the Ontario municipal insurance market in the last 12 months, on a selective basis.