What you need to Know to Make Decisions During Tough Times

Report
Presenters
James Marta CPA, ARPM
Principal
James Marta & Company LLP
Jake O’Malley
Executive Director
Municipal Pooling Authority
1

Boards have had to make conscious decisions
to trade off certain long-term objectives to
meet member short-term needs. Do you
know when you are going into the red zone?
How can the board manage these short-term
tradeoffs and meet long-term objectives?
2
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Assist boards members and managers to
understand what the board should monitor
and what needs to be communicated to help
the board make decisions. Ensuring board
members are involved, informed and the pool
is meeting funding and stability targets.
3
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Economy
Political
Benefit costs
4
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Is your pool cutting its
funding margin?
Is your discount rate your
using much larger than
what you will be earning in
the next few years?
Are you returning net
assets?
Are your members cutting
back on risk management?
Increasing SIR?
Were these suppose to be
short-term conditions that
are now the “New Normal?”
5
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Potential Effect
Dangerous Combination
Lowering your confidence level puts you at more risk against large
or multiple claims Returning equity that was earned over many
years instead of gradually may quickly change the pool’s resistance
to large changes in claims, or premium expenses
Discounting at a rate higher than future projected treasury rates
can become a hidden expense as the actuary continues to “unwind”
the discounted liabilities, you may not have the earnings to offset
the recognized costs. You could be in a deficit and not know it if
your discount rate is too high. The revenue wouldn’t be enough to
cover the discounted claim liability.
6
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Understand that there may be a gap between
Members:
 What they want vs. what they need
 E.g. broad coverage, at low rates, with
dividend stream
 Remind directors they wear two hats
JO
7
Partnering to protect the human and financial
resources of our Member Cities, thereby allowing
Members to continually improve their level of
community services.
By:
 Stabilizing rates and operational costs
 Providing responsive, innovative and
professional risk management services;
 Exercising pro-active loss control and risk
prevention programs to control costs and
provide a safe work environment;
 Maintaining a leadership role in the JPA
community
JO
8
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Highly placed & educated at their Agency
(e.g. City Managers, Asst. City Managers, City Attorneys, Finance
Directors, Risk Managers)
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They are part time to Pool management
Stable within the Public Sector, but do move
around
Very little experience in Pool financing, such
as rating plans, retrospective formulas, exmods, etc.
Work their way through Pool Board /
Committee structure, then rotate out of key
positions
JO
9
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Do members understand where you need to
be?
Are you making this information regularly
available to make decisions.
◦ Are your target benchmarks part of your regular
rate setting process?
◦ Are you trending losses and equity?
10
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Rates
Financial position
Benchmarks (targeted equity)
How have you faired in the past
What is on your horizon
Members
◦ Happy, content, they understand
11
25,000,000
20,000,000
Gross Contributions
Insurance / reinsurance premiums
Net Contributions
15,000,000
Net Assets (Equity)
Claim Liabilities (outstanding claims;
reserved and IBNR)
10,000,000
5,000,000
2007
2008
2009
2010
12
17,000,000
16,000,000
15,000,000
14,000,000
13,000,000
12,000,000
11,000,000
Claims Liability
10,000,000
Equity
9,000,000
SIR
8,000,000
5 times SIR to Equity
7,000,000
10 times SIR to Equity
6,000,000
(Claims Liab + Prem) x 25%
5,000,000
(Claims Liab + Prem) x 50%
4,000,000
Oregon 25% Prem:Equity
3,000,000
Oregon Req. + 25%
2,000,000
1,000,000
2007
2008
2009
2010
13
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Information over time
◦ Claims
 How elements are changing
 Liability settlements
 Medical costs
 Statutory benefits
◦
◦
◦
◦
Financial
Efforts
Social economics
Other
14
Number of days
LOST WORK DAYS PER CLAIM PER FISCAL YEAR
25
20
15
10
5
0
2000-01
2001-02
2002-03
2003-04
2004-05
$ 1,600,000
5.25
4.50
1,200,000
3.75
3.00
800,000
2.25
2005-06
RATES VERSUS
DIVIDENDS
1.50
400,000
0.75
0
0.00
99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07
Dividends
Rates
JO
15
Injury Rates
40.0
30
40.1
31.6
30.0
20.0
25
27.3
28.4
15.3
10.0
27.2
20
23.5
15
15
12.6
12.1
0.0
10
Per 100 FTE
Per $10M Payroll
50.0
5
0
99-00 00-01 01-02 02-03 03-04 04-05 05-06
$4,000
$3,000
189
194
225
215
167
161
175
125
$2,000
75
$1,000
25
$0
-25
01-02
02-03
Cost
03-04
04-05
Police Injury History
05-06
Freq.
JO
16
Equity Position Analysis by Program
$ 15
12
Millions
9
6
3
0
-3
98-99
99-00
Liability
00-01
01-02
Work Comp
02-03
03-04
04-05
Others
JO
17
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Losses
Equity
Members
Exposures
18
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Compare to your benchmarks
Compare to where you have been over time
Figure out the direction
19
Police Injuries
Misc
9%
Tactical
Training
4%
Combative
Persons
28%
Motor
Vehicle
9%
Bend, stoop
lift carry,
push, pull,
reach,
walk,run, slip,
fall, Cum.
Trauma
Non
Combat
Physical
Activity
50%
20
Loss Rate /
Incident Rate
Loss Rate
18
16
14
12
10
8
6
4
2
0
A
B
Incident Rate
C
MPA
D
E
F
10,000
8,000
Average Cost
Per Claim
6,000
4,000
2,000
0
A
B
C
MPA
D
E
F
JO
21
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Are you where you need to be?
What can you do to change?
What must you do?
What are the realities?
22
In risk financing your learn you can fund claims
at different points
 Before the loss
 During the loss
 After the loss
23
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Among members
Through fiscal years
This smoothes costs over time
24
Low Rates
Program Funding
Stability
"If you have money you have options"
25
Market Rates
Optimal pooled rates
26
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Communication, education and training
Make your operation transparent
Demonstrate you and your staff know what
you’re doing
Give the Directors the requisite skills to
make intelligent, informed decisions
JO
27
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They understand organization governance
– from their own work experience
Provide an understanding of risk
management, risk financing, pool
capitalization and funding
Introduce enough knowledge, so they can
ask staff the right questions
JO
28

The financing: the impact of short-term
decisions on the long-term position
◦
◦
◦
◦
◦
◦
Lower confidence level
Higher retention
Returning equity through dividends
Returning equity through rate discounts
Discount level not consistent with earnings
Zero rate increases
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◦ Benchmarks
◦ Strengths and weaknesses of benchmarks
◦ Tracking these benchmarks over time; are they
eroding?
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JO
31
• What is changing, what isn’t
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◦ What is the financial position?
◦ What is the direction?
◦ What is the GASB 68 impact? (recording pension
liabilities)
◦ Where does the pool need to be going?
◦ What does the pool need to do to meet its goals;
are you in the green, yellow or red zone?
33
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Set targets for equity that consider
◦ Confidence level
◦ Self-insured retention
◦ Rate Stabilization considerations
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Watch the growth in medical insurance costs
and analyze how medical costs would
translate into increased workers’
compensation costs.
Analyze trends
34
Liability
1
2
3
4
5
6
2010
21,091,358
8,824,917
12,266,441
14,687,804
14,687,804
Gross Contributions
Less insurance / reinsurance premiums
Net Contributions
Net Assets (Equity)
Invested in building and equipment or other
Net available to fund claims
7 Claim Liabilities (outstanding claims; reserved and IBNR)
10,993,838
8 Self-Insured Retention - (pooled portion of each claim) *
600,000
9 Claim funding (6+7)
25,681,642
Confidence Level Factors Required Margin
Total
Expected
10,993,838
70%
2,198,768
13,192,606
75%
80%
4,837,289
15,831,127
85%
90%
8,003,514
18,997,352
met
met
met
met
Liability
Calculated
Equity Target Formulas
Current balance no provision
Contributions to equity
Equity to SIR
Equity to SIR
Equity to SIR
Equity to SIR
Equity to SIR
Loss reserves to equity
Claim Liab with Premium Method
Claim Liab with Premium Method
Claim Funding Stress Factor
Equity to Premium Stress Factor
Oregon requirement
Factor
less than 3:1
less than 4:1
(Claim liab + Prem) times factor
(Claim liab + Prem) times factor
New Pool <5:1 Mature Pool < 2.5:1 and 0
Surplus > 25% of net contributions
3.0
4
5
6
7
10
4
0.25
0.50
5
0.25
14,687,804
1.44
2,400,000
3,000,000
3,600,000
4,200,000
6,000,000
0.75
8,021,299
16,042,598
2.34
0.75
3,066,610
Met
Met
Met
Met
Met
Met
Met
NotMet
NotMet
Met
Met
35
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Understand the cyclical nature of the markets
“pragmatically look forward”
Keep sufficient reserves . . . “when you have
money you have options”
Not succumb to cash flow budgeting and rate
setting
Anticipate trends
“The will to do what is needed”
36
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We don’t want to be one of your problems.
Being stable and reliable is what you need.
Underfunding the pool will have long-term
consequences
We might be put into a position where we
don’t have choices.
37
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Low rates
Dividends
Lower confidence levels
Is your discount rate achievable?
38
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Remember:
be conservative
think long-term
stability
don’t fall behind by
ratcheting down rates
overtime
don’t get caught off
guard
39
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What will you do now?
James Marta CPA, ARPM
Principal
James Marta & Company LLP
Certified Public Accountants
916-993-9494
[email protected]
www.jpmcpa.com
40

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