ABAG PLAN Corp.Strategic Planning

MeetingOctober 9, 2002

Campbell, CA

AGENDA

Where are we now? Progress Since Last Meeting Issues Remaining

Where are we going? 1 year 2-5 years

AGENDA

Review of Objectives & Next 8 Months Progress Since Last Meeting Issues at Next Board Meeting

Future Trends and Coverage Issues Environment Changes

Managing Pool Funds What is the ultimate goal?

WOTS Analysis and Updated Objectives Where Do We Go From Here?

Planning Meeting Goals

Review & Renew our Mission Agree on future characteristics of the poolClear idea of what members want to

achieveEstablish benchmarks for determining

success

Issues For Today

Digest remaining issues from last meetingReview current financial condition & ratios Review current environment of pool Plan for funding beyond meeting goal of

$10 mil in SIR FundAssess WOTS Revise objectives

ABAG PLAN Mission Statement

The purpose of the PLAN is to benefit the citizens of each Member Entity by establishing a stable, cost-effective self-insurance, risk sharing and risk management program for each Member Entity.

2001 Planning Meeting ProgressEight Goals Identified

Update Strategic Plan Annually - we’re here! Funding Policy - Approved 5/22/02 Staffing Plan - Approved & Implemented Document Review - begun but limited Evaluate Loss Control Approach - begun Define Committee Roles - begun Become Accredited? TBD Wrap up for CIP? Not needed

Remaining Goals

Document Review Evaluate Loss Control Approach Define Committee Roles Staffing Plan - Continue to Monitor

Update Strategic Plan - Annually

Become Accredited? TBD based on Doc Review

Goals Completed by Next Board Meeting

Document Review Claim Policy

• Authority Levels

• Dispute Resolution

Evaluate Loss Control Approach Loss Control Policy

• Expectations

• Enforcement

Big Issues For Next Board Meeting

DIVIDENDS SIR Fund Target of $10 mil reached Potential for Dividends - Declare?

SIR Increase SIR to $10 mil? Continue to purchase excess insurance? Are we done contributing to SIR Fund? Where do we go from here?

Other Issues For Next Board Meeting

Document Review So far have been addressing via policies and

past precedent but at some point will need to “roll up” in to governing documents.

Where to put policies re withdrawal & reentry? Revise Memo of Coverage? Risk Coverage

Agreement? Work on draft?

Other Issues at Next Board Meeting

Extent of Support for Risk Management Programs - Loss Control Policy Develop list of required policies & programs? To what extent do we mandate policies and

how do we enforce? Funding commitment Expand current offerings

Financials as of 6/30/02

Liability Program - $35 Mil Assets $15.7 Mil Total Liabilities (50% CL) $19.3 Mil Retained Earnings

Property Program - $2 Mil Assets $159,000 Total Liabilities $1,925,725 Retained Earnings

ABAG PLAN CORPORATIONPeriod: JUN-02 Currency: USD

Total Admin Fund Liability Fund Property Fund

ASSETS

CASH IN BANK 346,321.99 0.00 340,865.18 5,456.81

LOCAL AGENCY INVEST. FUND 13,047,472.18 444,784.68 10,523,455.43 2,079,232.07

INVESTMENTS IN SECURITIES 23,000,000.00 0.00 23,000,000.00 0.00

DISCOUNT ON SECURITIES (28,293.25) 0.00 (28,293.25) 0.00

PREMIUM ON SECURITIES 321,843.39 0.00 321,843.39 0.00

NET INVESTMENTS IN SECURITIES 23,293,550.14 0.00 23,293,550.14 0.00

ACCT. REC. CLAIMS REIMB. 244,800.34 0.00 244,800.34 0.00

ACCR. INT. REC. LAIF 100,797.94 0.00 100,797.94 0.00

ACCR. INT. REC. SECURITIES 315,316.17 0.00 315,316.17 0.00

CAPITIALIZED SOFTWARE 278,253.22 0.00 278,253.22 0.00

FURNITURE & EQUIPMENT 25,776.51 0.00 25,776.51 0.00

ACCUM. DEPREC. FURN. & EQUIP. (25,776.51) 0.00 (25,776.51) 0.00

TOTAL ASSETS 37,626,511.98 444,784.68 35,097,038.42 2,084,688.88

LIABILITIES

ACCOUNTS PAYABLE 151,970.12 138,840.90 11,666.14 1,463.08

CLAIMS RESERVE 15,122,424.51 0.00 15,065,597.40 56,827.11

ABOVE-DEDUCTIBLE CLAIMS PAID (856,917.34) 0.00 (785,165.55) (71,751.79)

ADJUSTMENT TO CLAIM RESERVE 1,597,024.48 0.00 1,424,599.80 172,424.68

CLAIMS RESERVE AT MONTH-END 15,862,531.65 0.00 15,705,031.65 157,500.00

TOTAL LIABILITIES 16,014,501.77 138,840.90 15,716,697.79 158,963.08

FUND EQUITY

GENERAL EQUITY

RETAINED EARNINGS 17,616,628.10 277,341.69 15,445,571.01 1,893,715.40

CURRENT YEAR SURPLUS/(DEFICIT) 3,995,382.11 28,602.09 3,934,769.62 32,010.40

TOTAL GENERAL FUND 21,612,010.21 305,943.78 19,380,340.63 1,925,725.80

TOTAL FUND BALANCE 21,612,010.21 305,943.78 19,380,340.63 1,925,725.80

TOTAL LIABILITIES AND FUND EQUITY 37,626,511.98 444,784.68 35,097,038.42 2,084,688.88

INCOME STATEMENTFOR FISCAL YEAR ENDED JUNE 30, 2002Revenue Premiums from members Administrative 1,500,001$ General Liability Insurance 3,986,239 Property Insurance 516,423 Investment Income 1,844,336 Training Revenue 4,950 TOTAL REVENUE 7,851,949$

Expenses Provision for Claims and Claims Adjustment 1,602,817$ Property Insurance Coverage 347,012 Depreciation 61,834 Management and Administrative 1,295,276 Insurance & Bond 263,979 Contract Services & Other Expenses 285,649 TOTAL EXPENSES 3,856,567$

SURPLUS 3,995,382$

6/30/02ASSETS

Investment at Fair

Market Value

61%

Cash and Cash

Equivalents

36%

Accounts

Receivable

2%Equipment, Net

1%

Cash and Cash Equivalents 13,393,794$ Investment at Fair Market Value 23,293,550 Accounts Receivable 660,914 Equipment, Net 278,253

TOTAL: 37,626,512$

6/30/02Liabilities and Retained Earnings

Other Payable

0%

Claims Reserves

42%

Retained Earnings

58%

Claims Reserves 15,862,532$ Other Payable 151,970 Retained Earnings 21,612,010

TOTAL: 37,626,512$

Financial PositionFiscal Years 1996-2002

0

2000000

4000000

6000000

8000000

10000000

1996 1997 1998 1999 2000 2001 2002

Fiscal Year Ended

Revenue Expenses Surplus

Investment Earnings

ABAG PLAN CORPORATION

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

90 91 92 93 94 95 96 97 98 99 00 01 02

INV

ES

TM

EN

T E

AR

NIN

GS

($0

00)

0

5,000

10,000

15,000

20,000

25,000

Fiscal Yr. Cumulative

Liability Deposits

ABAG PLAN CORPORATION

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

90 91 92 93 94 95 96 97 98 99 00 01 02

GE

NE

RA

L L

IAB

ILIT

Y D

EP

OS

ITS

($0

00)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Fiscal Yr. Cumulative

Dividend DistributionABAG PLAN CORPORATION

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

90 91 92 93 94 95 96 97 98 99 00 01 02

DIV

IDE

ND

DIS

TR

IUB

TIO

N

0

5,000

10,000

15,000

20,000

25,000

Fiscal Yr. Cumulative

Financial Ratio Numbers

Net Deposits = $4.5 MilTotal Liabilities = $15.7 MilTotal Fund = $19.3 Mil

Funding PolicyBenchmarks

Yearly Deposit at least 50% CL Goal = 70%.

Total Fund to SIR ratio at least 2:1 Goal = 3:1

Maintain SIR Fund = PLAN SIR Goal = $10 Million

Maintain Risk Margin Fund at 90% CL

Fund to SIR

Measures Conservatism in FundingCommercial insurers typically at 10:1 to 20:1Pools typically at 5:1 to 15:1ABAG ratio is below benchmarks at 3.8:1

Within Funding Policy Goal of 3:1 Minimum = 2:1

Options to consider Lower SIR Increase Surplus

Exhibit 20

Deposit to Fund

Measures growth potential supported by FundCommercial insurers typically at 1:1 to 3:1Pools typically at 5:1 to 2.5:1PLAN ratio is better than benchmarks at .23:1Options

Write more business Return surplus

Exhibit 21

Loss Reserves to Fund

Measures contingency fundingCommercial insurers typically at 1:1 to 3:1Pools typically at 0.4:1 to 2.5:1PLAN ratio is within benchmarks at .81:1

$15.7:$19.3 Options

Write more business Return surplus

Exhibit 22

Future Trends and Coverage Issues

Insurance Market Continues to Harden Coverage is being restricted

Mold Terrorism

Interest Rates Remain Low Funding goal is to increase to 70% CL PLAN Document & Coverage Review

Future TrendsInsurance Market

Expect continued price increases Impact on Funding Options Impact on SIR

Coverage Restrictions PLAN exclude terrorism or mold, too? Others on the way?

Future TrendsInterest Rates

At record lowsUsing 4.5% vs. Traditional 5%

0.5% drop increased funding @ $200,000 and increased outstanding liabilities

No immediate pressure to increasePossible DeflationAny Estimates?

Future Trends

Your Budgets?Your Concerns?

Funding Goal = 70% CL

Currently at 50% CL (up from @48%)Raise to 60% for 2002-03?Would add $626,556 or 14% to Current

Funding ($5,153,766 v. $4,527,210)

Options? Increase Funding Use Retained Funds? Lower SIR?

PLAN Document Review

Bylaws Joint & Several Liability? Clean up language, incl.. Committee Roles

Revised Risk Coverage Agreement Withdrawal, Expulsion & Reentry Assessment Clarify Ownership of Funds Require Risk Management Program/Policies

PLAN Coverage Review

Memo of Coverage Clean up & Condense Clarify intent and definitions Add dispute resolution

Broaden Coverage? Employment Practices Liability Clarify Inverse Exclusions Attorney Fees Covered? Emotional Distress?

Managing Pool Funds

1986 - 1990: Growth of Risk Margin Fund1991 - 1996: Dividends Declared1997 - 1998: $3.4 mil Dividend, SIR Fund

Created and Net Expense = $196,000 1998 - 2001: Increased SIR, Loss Funding,

& SIR Fund, Decreased Dividends 2002 - 2005: SIR Fund Done? Dividends

Again? Pool Nirvana?

What is Adequate Amount of Retained Funds?

“It Depends” Aversion to Risk Ability to Assess Large Loss Probability Strategic Goals

Leverage Ratios

Pool Nirvana

Assets & Interest >= Deposits + AdminNo new funds are EVER required Is that a realistic goal? Should it be a goal of the PLAN?Great way to view dividends, interest, and

funding from a strategic standpoint.Measure of opportunity cost

Pool NirvanaIs it Realistic?

Other Pools Achieved?Under what conditions?How has the PLAN compared?Could we achieve it now?

Pool Nirvana PLAN Results

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

91 92 93 94 95 96 97 98 99 '00 '01 '02

DepositsDividendsInterestAdmin

Pool Nirvana PLAN Results

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

91 92 93 94 95 96

DepositsDividendsInterestAdmin

Pool Nirvana PLAN Results

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

97 98 99 '00 '01 '02

DepositsDividendsInterestAdmin

Pool Nirvana PLAN Net Expense

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

91 92 93 94 95 96 97 98 99 '00 '01 '02

ExpenseIncomeNet Expense

Pool NirvanaWithout SIR Fund

($2,000)

($1,000)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

90 91 92 93 94 95 96 97 98 99 '00 '01 '02

Expense

Income

Difference*

Net ExpenseSIR Fund Comparison

($2,000)

($1,000)

$0

$1,000

$2,000

$3,000

$4,000

97-98 98-99 99-00 00-01 '01-02

With SIRNo SIR

Pool NirvanaShould It Be a Goal?

Other Uses of Funds Dividends Reduce Funding Increase SIR Increase Occurrence Limit New Programs or Coverages Increase Services - esp.. Loss Control

Pool NirvanaShould It Be a Goal?

How would that change our current goals and practices? SIR Fund = $10 mil SIR = $10 mil? Dividends? Funding Credits

Pool NirvanaReality

Interest Rate and Loss Probabilities make it unpredictable

Possible By-product of Overall Funding Strategy

Is a goal in the sense it reflects pool stability and efficiency

Good tool in measuring funding options and strategic objectives

Pool NirvanaReality

Dividends should be used to make deposits more predictable

Help ease impact of budget fluctuationsDeposits above or below “predictable” level

(@ = payroll increase) should be based on member’s compliance with loss prevention policies and preventable losses

WOTS Analysis

WeaknessesOpportunitiesThreatsStrengths

Prior Planning Meetings

Strengths & Benefits Good Business Practices - Board, Staff & Members Financially Sound Members in Control & Act in Unison Commitment to Training Lower Premiums/stable pricing (How do we know?) Equity Distribution

Prior Planning Meetings

Weaknesses & Threats Complacency & lack of flexibility in responding to change Lack of some member involvement/connection Claims & Litigation Management Short-term vs. long-term thinking (i.e. equity expectations) Pressure to reduce costs No scheduled reassessment of member’s risk profile. Bad Loss Trends - large loss(es) impact on equity/surplus

2001 Board SurveyTop Planning Issues

Insured vs. Self-Insured FundingAddressing Specific Loss Control IssuesMaintaining Member ParticipationSetting Objectives - Long & Short TermBenchmarkingKeeping Costs Stable

2001 Board SurveyImproving Services

More On-Site Visits & RecommendationsBetter Explanation of Formulas, Budgets,

ServicesBetter Claim Reports

Graphs, Trends, etc.

Training in the Field

Challenges Identified 2001

Bring SIR in balance with FundGive up dividends?How decide if need excess insurance?How to respond to multiple losses?Work on updating PLAN documentsMonitor other’s Risk Management programs?Keep up on new member risks (mold)

Opportunities Identified 2001

Possible merger with other pool(s)?Group purchase EQ insurance. Find others

to fund EQ pool. Pool of cities?Cost containment to offset cost increases,

especially as member revenues fall.

2001 Board Goals Identified

Workload/staffing balance – keep services up.

Emphasize trainingRe-define Committee rolesLimit attorney rotation?Improve communication between claims

examiners and citizens

Strengths - 2002Power Point Presentation is niceRisk Management StaffResponsivenessTraining commitmentWeb site - docs availableLower premiums v. insurance marketProactive response to claim “incidents”Good mix of active Board members

Weaknesses/Threats - 2002

Reactive v. proactive trainingLoss of member staff talent, esp. in police,

due to PERS 3% at 50 retirementEconomy - member revenue down, PLAN

interest income lower.Members have no full-time risk managerNo authoritarian presence

Weaknesses/Threats - 2002

Lack of involvement/participationBoard member succession planningNo model set of risk management policiesNo re-assessment of risk management

profileProtection of asset basePer occurrence limit enough?

Fraud, including electronic fraudLitigation status communicationLonger statute (2 yrs) for civil rights claims

and limit time to file MSJInsurance market continued hardeningDiversity of member risks makes it more

difficult to address needs

Weaknesses/Threats - 2002

Weaknesses/Threats - 2002

Lack of health insurance leads to more pressure to file claims

Uninsured employees leads to Work Comp pressure

Opportunities - 2002

Risk Management Programs (like sewer program) lead to better identification of where money is spent and lead to more money to fix.

Sharing good ideas & “Best Practices”Growth of poolPool NirvanaPay dividend again

Opportunities - 2002

Fund Loss Prevention Program, including model practices and audit

Share knowledge & resources of staff and other members

Pay for Board member trainingScholarship fund for education in risk mgmtEarthquake exposure identified

Remaining Goals - 2001

Document Review Evaluate Loss Control ApproachDefine Committee Roles Staffing Plan - Continue to Monitor

Update Strategic Plan - Annually

Become Accredited? TBD based on Doc Review

Recommended New Goals -2002Implement loss control approach

List of Model Policies Audit of Members Policies and Practices

Reward or penalize members for participation or policies

Get alternates involvedContinue to evaluate the funding variables to

update/revise Funding Policy Draft revisions to Memorandum of Coverage