presenters james marta cpa, arpm principal james marta & company llp jake o’malley executive...
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What you need to Know to Make Decisions During Tough Times
Level - Board GovernanceExecutive Directors
Finance
PresentersJames Marta CPA, ARPM
Principal James Marta & Company LLP
Jake O’MalleyExecutive Director
Municipal Pooling Authority
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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?
Session
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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.
Objective
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Economy Political Benefit costs
Our current environment
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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?”
How is your JPA facing tough times?
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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.
What are the consequences?
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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
Member Expectations
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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
Mission Statement
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Highly placed & educated at their Agency(e.g. City Managers, Asst. City Managers, City Attorneys, Finance Directors, Risk Managers)
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, ex-mods, etc.
Work their way through Pool Board / Committee structure, then rotate out of key positions
Typical Pool Board of Directors
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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?
Where you need to be
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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
How do you measure up?
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Financial Information
-
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
2007 2008 2009 2010
Gross Contributions
Insurance / reinsurance premiums
Net Contributions
Net Assets (Equity)
Claim Liabilities (outstanding claims;reserved and IBNR)
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Combination of Tests
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000
11,000,000
12,000,000
13,000,000
14,000,000
15,000,000
16,000,000
17,000,000
2007 2008 2009 2010
Claims Liability
Equity
SIR
5 times SIR to Equity
10 times SIR to Equity
(Claims Liab + Prem) x 25%
(Claims Liab + Prem) x 50%
Oregon 25% Prem:Equity
Oregon Req. + 25%
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Information over time◦ Claims
How elements are changing Liability settlements Medical costs Statutory benefits
◦ Financial◦ Efforts◦ Social economics◦ Other
What should you look at?
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Internal Benchmarks: Workers’ Comp
05
10152025
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
Nu
mb
er o
f d
ays
LOST WORK DAYS PER CLAIM PER FISCAL YEAR
0
400,000
800,000
1,200,000
1,600,000
99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07
0.00
0.75
1.50
2.25
3.00
3.75
4.50
5.25
Dividends Rates
$
RATES VERSUS
DIVIDENDS
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Internal Benchmarks: Risk Control
23.527.228.427.331.6
40.1
12.11515.3
12.6
0.0
10.0
20.0
30.0
40.0
50.0
99-00 00-01 01-02 02-03 03-04 04-05 05-06
Per
$10M
Payro
ll
0
5
10
15
20
25
30
Per 100 FTE
189 194215
167 161
$0
$1,000
$2,000
$3,000
$4,000
01-02 02-03 03-04 04-05 05-06
-25
25
75
125
175
225
Cost Freq.
Injury Rates
Police Injury History
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Internal Benchmarks: Financials
CONSOLIDATED BALANCE SHEET
Equity Position Analysis by Program
CONSOLIDATED BALANCE SHEET
-3
0
3
6
9
12
15
Millions
98-99 99-00 00-01 01-02 02-03 03-04 04-05
Liability Work Comp Others
$
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Losses Equity Members Exposures
How are you forecasting the future?
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Compare to your benchmarks Compare to where you have been over time Figure out the direction
How do you look at this information
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Internal Benchmarks: Risk Control
Police Injuries
Combative Persons
28%
Tactical Training
4%
Non Combat Physical Activity
50%
Motor Vehicle
9%
Misc9%
Bend, stoop lift carry, push, pull, reach, walk,run, slip, fall, Cum. Trauma
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External Benchmark: CIPRA
0
2,000
4,000
6,000
8,000
10,000
A B C MPA D E F
02
468
101214
1618
A B C MPA D E F
Loss Rate Incident Rate
Loss Rate / Incident
Rate
Average Cost Per Claim
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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?
What next
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In risk financing your learn you can fund claims at different points
Before the loss During the loss After the loss
Funding Your Claims
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Among members Through fiscal years This smoothes costs over time
Risk financing and sharing allows pools to smooth losses
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Balancing wants and needs
Low Rates Program Funding
Stability
"If you have money you have options"
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Market Rates
Optimal pooled rates
Pooling for long-term stability
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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
Taking the Mystery out of Pool Administration
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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
How Much do Directors Need to Know?
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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
What you need to consider
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◦ Benchmarks◦ Strengths and weaknesses of benchmarks◦ Tracking these benchmarks over time; are they
eroding?
What financial information the board should monitor
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Loss Control – Real Time Numbers
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• What is changing, what isn’t
Claim information
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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?
In this cycle where do you think you are going and what does this mean in making decisions while balancing members wants and needs
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Set targets for equity that consider◦ Confidence level◦ Self-insured retention◦ Rate Stabilization considerations
Watch the growth in medical insurance costs and analyze how medical costs would translate into increased workers’ compensation costs.
Analyze trends
Take a fresh look at equity targets
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Summary of basic testsLiability
20101 Gross Contributions 21,091,358 2 Less insurance / reinsurance premiums 8,824,917 3 Net Contributions 12,266,441 4 Net Assets (Equity) 14,687,804 5 Invested in building and equipment or other - 6 Net available to fund claims 14,687,804
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 TotalExpected - 10,993,838 met
70% 2,198,768 13,192,606 met75% - 80% 4,837,289 15,831,127 met85% - 90% 8,003,514 18,997,352 met
LiabilityCalculated
Equity Target Formulas FactorCurrent balance no provision 14,687,804 Contributions to equity less than 3:1 3.0 1.44 MetEquity to SIR 4 2,400,000 MetEquity to SIR 5 3,000,000 MetEquity to SIR 6 3,600,000 MetEquity to SIR 7 4,200,000 MetEquity to SIR 10 6,000,000 MetLoss reserves to equity less than 4:1 4 0.75 MetClaim Liab with Premium Method (Claim liab + Prem) times factor 0.25 8,021,299 NotMetClaim Liab with Premium Method (Claim liab + Prem) times factor 0.50 16,042,598 NotMet
Claim Funding Stress Factor 2.34 Equity to Premium Stress Factor New Pool <5:1 Mature Pool < 2.5:1 and 0 5 0.75 Met Oregon requirement Surplus > 25% of net contributions 0.25 3,066,610 Met
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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”
What you should be doing now
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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.
What does the pool manager need to be telling the board?
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Low rates Dividends Lower confidence levels Is your discount rate achievable?
Are you putting your pool at risk?
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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
Conclusions
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What will you do now?
James Marta CPA, ARPMPrincipal James Marta & Company LLPCertified Public Accountants916-993-9494 [email protected] www.jpmcpa.com
Questions?