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HomeMy WebLinkAbout1979-12-INSURANCE-rpt.pdf -• • 5frYa 10— ;If "totii. TOWN OF LEXINGTON INSURANCE COMMITTEE REPORT TO THE BOARD OF SELECTMEN DECEMBER, 1979 4 • k • INTRODUCTION • In August, 1979, the formation of a committee of five citizens to review the Town' s insurance programs was approved by the Board of Selectmen of the Town of Lex- ington. During September through early December, the committee reviewed the present insurance carried by the Town, paying particular attention to the adequacy of the coverage and focusing on opportunities to reduce the current cost while still maintaining adequate insurance.. This report summarizes our observations, with conclusions where appropriate. Several questions raised require additional work and are currently being pursued by Town personnel. We are pleased to have had the opportunity to serve the Town and appreciate the assistance we received from both Town personnel, particularly Nancy Banks, _and the Town' s insurance agents. . 4 a John F. Mackey, Chairman John H. Dyer Daniel Lucas Paul W. Marshall Elaine M. Sullivan • WORKMEN'S COMPENSATION INSURANCE We were requested to give particular attention to workmen's compensation insurance and whether self insurance would he an effective alternative for the Town to consider_ We have re- viewed the Town' s current costs, loss history and the nature of those losses. The Town's workmen's compensation premiums are heavily depend- ent on payroll costs and prior loss experiences. Theloss ex7erience of-the three fiscal years preceding the prior year have a significant impact on the rate. In the Town of Lexing- ton's case, two of the three years included in the determina- tion of the current year premium were yearsin which the claims were extremely high compared to earlier years or the one sub-- seguent year (the year ended June 30, 1979) . As a result, the fiscal 1980 premium will be approximately $140,000 and the incurance agent' s estimate of fiscal .1981 expense is $170,000. In fiscal 1982, one of the two bad years (fiscal 1977) will be eliminated from the calculation and the second bad year will be. _ dmpped in fiscal 1983's rate calculation. The impact of these changes will be dependent on the Town's ability to contain future claims. _ If the Town were to switch to self-insurance, we believe it would be necessary to: 1. Purchase a services contract andexcess coverage policy from one of a handful of companies who are willing to write such policies. The services contract would pro- vide a competent, experienced firm to administer the claims With the Town and assist in establishing improved risk management in an effort to reduce or con- trol the number of claims. The excess coverage policy would limit the Town's exposure to an abnormally high claim individually or extremely bad year in the aggre- gate. The services contract. would .probably be approxi- mately $30,000 and the cost of excess coverage would be bid by the insurance company based partly on their evaluation of the Town's past experience. They would require accident history information to form this evaluation. 2. The Town would also have to establish an escrow fund to pay claims from. The escrow fund could be maintained in interest-bearing (earning) assets.. A member of this committee has discussed self insurance with people knowledgeable in that specialty and has been informed that self insurance is usually--not a cost-effective`_- alter-native--if-- current premiums are leas:'-than $200,.000. 4. - 2 - We do not recommend self insurance at this time. Our decision is based on the following factors : 1. The Town's 'claim experience through June 30, 1978 was - not'good. i,Claims were high and the'ToWn is in an assigned risk pool. Being in the assigned risk- pool has not had any effect on premiums due to the way workmen's compensation coverage is administered in Massachusetts. Although fiscal 1979 showed substan- tial claims improvement to date, we cannot conclude that the situation is reversed because several 1979 claims remain open. Also, one year (197.9) is too short a time period to base conclusions on. In addition, workmen' s compensation insurance rates have been historically low on a state-wide basis cm- _ pared to loss experience. In summary, present workmen's compensation coverage has been a very cost effective policy for the Town in past years. 2. A workmen' s compensation insurance rate increase of 24 is before the State Commissioner of Insurance. The increase to be granted is expected to be substan- tially less, although no clear data is available to substantiate that industry expectation. We believe that the Town should wait for the rate decision before any final decision on workmen's compensation insurance. , 3. Fiscal 1981 is the last fiscal year in which both extra- ordinally bad years (1977 and 1978) are included in the rate calculation. We believe that during the next four to five months the Town administration can approach insurance carriers to solidify cost _ . - - estimates of administration, excess coverage and escrow account costs to provide more empirical data for a conclusion. That time frame will be needed .due to the information requirements that any potential bidder would need. More importantly, considering the Town' s experience, we believe a comprehensive safety program should be instituted to provide improved control over the avoidance and reduction of accidents and resultant claims. The present Town program is re- porting (clerical) in scope and does not focus heavily on pre- vention. We cannot emphasize enough that this paragraph is the most important part of our discussion on workmen ' s compensation costs and would be an important plus- to any insurance carrier willing to consider providing workman'Scatipen.sation insurance on- either an insured or self-insured basis . - 3 - AUTOMOBILE COVERAGE The Town 's automobile accident experience has been excellent. Our observations in this area are principally to limit coverage more in light of such experience. Despite the favorable expe- rience, we suggest that a formal risk management program also extend to this area. Our other recommendations are as follows: 1 . Consider raising the deductibles on collision,, fire and vandalism coverage to $500 . We do not believe theft coverage is required based on past experience. We understand that the Town has already adopted this recommendation. 2. Consider dropping collision, fire and vandalism on vehicles with a value less than $2,000 . The $500 deductible proposed would result in these vehicles having little insurable value. 3. Consider carrying liability only on police vehicles. Other coverages, such as collision, fire and vandalism, on police vehicles cost approximately $4, 000 in. the past year and also, presumably, had an unfavorable impact on the overall rate. These savings must be - measured in relation to accident/vandalism related repairs in the past and current costs of vehicle replacement. PROPERTY COVERAGE While we have several cost saving suggestions in the property area, we are also concerned that there may be an uninsured risk of lia- bility at the schools and other Town Buildings not covered under the - present coverage. Present liability coverage of $1,000,000 bodily injury and $1, 000,000 property damage only covers the landfill, water and sewer operations, libraries and Council on Aging. We have asked that Town counsel address whether the Town would be liable for acci- dents on other Town property. Umbrella liability coverage should be considered to provide excess liability coverage over the present automotive and general liability contracts. Our cost saving suggestions in the property area are: 1. Consider increasing the deductible to $25,000. We expect this would save $6, 000 or more in annual premiums. 2 . Consider deleting coverage for buildings with a value of less than $50, 000. These buildings would have little insurable value with a. $25, 000 deductible and their elimination would reduce the overall blanket fire rate. - 4 - 3. Consider eliminating coverage for closed' schools- The Parker school has no sprinkler system, is unoccupied and is therefore very expensive. Full reimbursement of an insured loss is made only if a structure is rebuilt. If one of these buildings burned and was not replaced, reimbursement would be substantially less . The premiums on the Parker., Adams, Monroe_ and Muzzey buildings in the current year are $17,895. We believe that the unsprinkled buildings (Parker and Adams) also have an unfavorable impact on the overall blanket rate. When considering this suggestion, it is necessary to give weight to the possible impact on the larger structures, i.e. Muzzey, of a partial loss not covered. If the Town felt the damage from such a loss would be reconstructed, then such building should remain insured. If the Town - was to lease these premises, use as office or light occupancy space would be preferable from an insurance premium standpoint. MEDICAL COVERAGE In evaluating medical coverage costs, we had to ensure not to raise employee benefit questions. Consequently, we have evaluated medical coverage only from the standpoint of potential reduction of costs _ with Blue Cross/Blue Shield (Blue Cross) , the Town's insurer_ Dennis Adams of Blue Cross met with us, has informed us that he will submit data for a "Reinsured Cost Plus" plan with a limited loss provision on the present policy anniversary date. This plan amounts to self insurance with a claims and administration fee payable to Blue Cross. One area of potential cost reduction that we believe should be pur- sued is with regard to retirees. A retiree who is at least 65 years old and is a member of the Social Security system (SSS) automatically gets Medicare A through SSS. He also can select similar coverage through Medicare B and Medex, both of which have a premium.. Since these retirees are covered by the Town by law with benefits equiva- lent to current employees, the Town pays 75% of the cost of their Blue Cross coverage. If the retiree selects Medicare B and Medex when signing with SSS, the employee would no longer be in the Blue Cross program. We believe most retirees have selected to remain on Blue Cross. Unfortunately, there has not been sufficient time to develop the historical data. The claims covered by Medex would no longer be in the Blue Cross claim experience, which could have a favorable effect thereon. ..,, • • o ' 5 We believe that if substantial numbers of retirees have not selected Medea, that a possible improvement would be to offer to leave the cost. to the retirees unchanged but request them to take Medex and thereby eliminate part of their claims from the experience portion of the Blue Cross rate calculation. Of course, we believe the final _ deciss.iol should be that of the employee: We believe the Town should explore with their Blue Cross representa– tive the opcortuniti es to better educate employees how to limit medical costs without sacrificing quality of health care. OTHER The Town should consider employing the services of a professional insu n—e_advisor whenever insurance is put out to bid_ Such an individual can structure the information in a request for proposal so that it is easier for insurance representatives to formulate, a bid. This might result in more bids being submitted, with result- ant possibilities for lower cost. 40 r l s t ! - i F C. e t 2 _ e c