To Retain or not to Retain – That is the Question Strategic Planning Workshop Presented to: STRIMA State Risk and Insurance Management Association September 16, 2009 Presented to: Presented by: Steven P. Kahn, CPCU, ARM | Managing Director ARM Tech / Aon Global Risk Consulting Phone: 949-470-4341 Fax: 847-953-1672 email: steven_kahn@armtech.com Presented by: Steven P. Kahn, CPCU, ARM | Managing Director ARM Tech / Aon Global Risk Consulting Phone: 949-470-4341 Fax: 847-953-1672 email: steven_kahn@armtech.com

Risk Financing Objectives Lowest long term cost of risk Cost stable within selected parameters

Cost of Risk Retained losses Risk transfer costs Program operation expenses Balance these costs to achieve desired outcome

Estimate Total Retained Losses Projected Ultimate Losses (000) Year Workers Compensation Property Liability Estimated Misc. Total 2000 $ 5,000 $ 750 $15,000 $150 $20,900 2001 8,000 500 25 16,525 2002 7,000 150 10,000 350 17,500 2003 1,000 7,500 175 19,175 2004 2,000 9,000 300 19,300 2005 13,500 1,250 12,000 200 26,950 2006 8,500 400 17,400 2007 4,000 11,000 50 23,550 2008 900 20,050

Determine Large Losses Number of Claims Exceeding $250,000 Range ($) Liability Workers Compensation Property Total $250,000 – $500,000 43 61 104 500,001 – 750,000 11 7 18 750,001 – 1,000,000 3 4 1,000,001 – 2,500,000 15 2 19 2,500,001+ 1

Observations on Expected Losses $20 to $23 million per year total Individual claims exceeding $2.5 million are rare

What is Risk Working definition: Deviation of actual results from expected results We are concerned with your ability to retain the unexpected

Risk Retention How much can the state afford to retain and still meet major financial objectives?

Source of Funds Risk management internal service fund General fund ending balance Special or enterprise funds Sale of bonds Governors reserve Catastrophe reserve Tax increase (not likely)

Payment of Unexpected Losses In the aggregate Per event

Loss Retention Capacity Sum of Losses state can expect to pay Unexpected losses state can afford to pay and still meet major financial objectives Determine amount per event and aggregate

Schedule of Current Insurance Line of Coverage Retention Limit Annual Premium Aircraft $0 Liability $50,000 – Hull 10,000,000 2,200,000 125,000 Blanket Property 250,000 500,000,000 3,750,000 Excess Liability 1,000,000 25,000,000 1,250,000 Blanket Crime Insurance 50,000 3,000,000 225,000 Capital Art Collection 25,000 75,000 State Park Historical Cabins 5,000 750,000 45,000 Auto Liability – Van Pool 62,000

Other Considerations Amount state can afford to retain vs amount it makes sense to retain Credit for alternative retentions Need for a particular service Contractual requirements Legislative mandates Can’t insure some losses Multi-year retentions Buy in from senior management