Finance Highlights 2011 1202 - Laserfiche WebLink

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It is also important to keep in mind that this is a retrospective look. It does not in any way imply that the City is not exposed to one or more claims above $500,000 in the coming year, even though the City's loss experience in this layer is very favorable. The City expects about 90 claims per year (both claims with zero dollars and payments); and the average annual cost per claim is about $13,000. About 98 % of the claims are below $100,000 (i.e. about 10 x average cost). Based on the City's loss experience, the possibility of a claim exceeding $500,000 is remote (3 out of 1,915 non -zero claims over 30 years, one recent claim of $1.95 million in 2007/08). While the loss experience to date indicates that the City has achieved savings by maintaining the $1 million SIR (since joining CJPRMA in 1986) instead of electing the $500,000 SIR, the decision whether to lower or maintain the current $1 million SIR depends on factors beyond the quantitative historical review. Qualitative factors should be considered such as risk capacity, as guided by the financial benchmarks discussed in (2) below, to withstand future claims (even though the City has remote possibilities of such claim), as well as its philosophy of risk aversion and potential exposure due to changing conditions or risk environment. (2) Financial Benchmark for Fund Balance In determining the adequacy of the financial position, several financial measures exist. Most of these are used by state insurance regulators to monitor solvency of insurance enterprises. Three key measures are (1) net contribution (net of reinsurance cost) -to- surplus, (2) reserves - to- surplus and (3) surplus -to -SIR. Reserves are the estimated outstanding losses, undiscounted and at the expected (55 %) confidence level. Surplus is defined as the excess of assets over liabilities. It broadly relates to net assets or, in the case of the City, the projected financial position. Net contribution -to- surplus ratio of 1:1 (judgmentally selected based on industry experience) is considered reasonable. The net contribution can be derived as the expected 2012/13 limited projected losses of about $1.2 million plus expenses (excluding reinsurance costs). We estimate the expenses at 20% (judgmentally selected based on industry experience) of the projected losses at about $0.24 million, for a total net contribution of about $1.44 million. For a 1:1 ratio, this implies a fund balance of $1.44 million. A reserve -to- surplus ratio of 2:1 is also considered reasonable. Using this target ratio and given the City's estimated outstanding losses for the general liability program of $4.5 million (see Table III — IA of the actuarial report date August 24, 2011), then the required surplus (financial position) would be about $2.25 million. A reasonable target for the surplus -to SIR ratio is 10:1, implying that the available funds are sufficient to absorb 10 large claims that reach the self - insured limit. For general liability, the required fund balance would be $10 million (i.e. the SIR of $1 million x 10). The City's loss L,