ABAG PLAN Corp. Strategic Planning Meeting October 9, 2002 Campbell, CA

AGENDA §Where are we now? l Progress Since Last Meeting l Issues Remaining §Where are we going? l 1 year l 2-5 years

AGENDA §Review of Objectives & Next 8 Months l Progress Since Last Meeting l Issues at Next Board Meeting §Future Trends and Coverage Issues l Environment Changes §Managing Pool Funds l What is the ultimate goal? §WOTS Analysis and Updated Objectives l Where Do We Go From Here?

Planning Meeting Goals §Review & Renew our Mission §Agree on future characteristics of the pool §Clear idea of what members want to achieve §Establish benchmarks for determining success

Issues For Today §Digest remaining issues from last meeting §Review current financial condition & ratios §Review current environment of pool §Plan for funding beyond meeting goal of $10 mil in SIR Fund §Assess 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 Progress §Eight Goals Identified l Update Strategic Plan Annually - we’re here! l Funding Policy - Approved 5/22/02 l Staffing Plan - Approved & Implemented l Document Review - begun but limited l Evaluate Loss Control Approach - begun l Define Committee Roles - begun l Become Accredited? TBD l Wrap up for CIP? Not needed

Remaining Goals l Document Review l Evaluate Loss Control Approach l Define Committee Roles l Staffing Plan - Continue to Monitor l Update Strategic Plan - Annually l Become Accredited? TBD based on Doc Review

Goals Completed by Next Board Meeting §Document Review l Claim Policy Authority Levels Dispute Resolution §Evaluate Loss Control Approach l Loss Control Policy Expectations Enforcement

Big Issues For Next Board Meeting §DIVIDENDS l SIR Fund Target of $10 mil reached l Potential for Dividends - Declare? §SIR l Increase SIR to $10 mil? l Continue to purchase excess insurance? l Are we done contributing to SIR Fund? l Where do we go from here?

Other Issues For Next Board Meeting §Document Review l So far have been addressing via policies and past precedent but at some point will need to “roll up” in to governing documents. l Where to put policies re withdrawal & reentry? l Revise Memo of Coverage? Risk Coverage Agreement? l Work on draft?

Other Issues at Next Board Meeting §Extent of Support for Risk Management Programs - Loss Control Policy l Develop list of required policies & programs? l To what extent do we mandate policies and how do we enforce? l Funding commitment l Expand current offerings

Financials as of 6/30/02 §Liability Program - $35 Mil Assets l $15.7 Mil Total Liabilities (50% CL) l $19.3 Mil Retained Earnings §Property Program - $2 Mil Assets l $159,000 Total Liabilities l $1,925,725 Retained Earnings

6/30/02

Investment Earnings

Liability Deposits

Dividend Distribution

Financial Ratio Numbers §Net Deposits = $4.5 Mil §Total Liabilities = $15.7 Mil §Total Fund = $19.3 Mil

Funding Policy Benchmarks §Yearly Deposit at least 50% CL l Goal = 70%. §Total Fund to SIR ratio at least 2:1 l Goal = 3:1 §Maintain SIR Fund = PLAN SIR l Goal = $10 Million §Maintain Risk Margin Fund at 90% CL

Fund to SIR §Measures Conservatism in Funding §Commercial insurers typically at 10:1 to 20:1 §Pools typically at 5:1 to 15:1 §ABAG ratio is below benchmarks at 3.8:1 l Within Funding Policy Goal of 3:1 l Minimum = 2:1 §Options to consider l Lower SIR l Increase Surplus Exhibit 20

Deposit to Fund §Measures growth potential supported by Fund §Commercial insurers typically at 1:1 to 3:1 §Pools typically at 5:1 to 2.5:1 §PLAN ratio is better than benchmarks at.23:1 §Options l Write more business l Return surplus Exhibit 21

Loss Reserves to Fund §Measures contingency funding §Commercial insurers typically at 1:1 to 3:1 §Pools typically at 0.4:1 to 2.5:1 §PLAN ratio is within benchmarks at.81:1 l $15.7:$19.3 §Options l Write more business l Return surplus Exhibit 22

Future Trends and Coverage Issues §Insurance Market Continues to Harden  §Coverage is being restricted  l Mold l Terrorism §Interest Rates Remain Low  §Funding goal is to increase to 70% CL  §PLAN Document & Coverage Review 

Future Trends Insurance Market §Expect continued price increases l Impact on Funding Options l Impact on SIR §Coverage Restrictions l PLAN exclude terrorism or mold, too? l Others on the way?

Future Trends Interest Rates §At record lows §Using 4.5% vs. Traditional 5% l 0.5% drop increased $200,000 and increased outstanding liabilities §No immediate pressure to increase §Possible Deflation §Any Estimates?

Future Trends §Your Budgets? §Your Concerns?

Funding Goal = 70% CL §Currently at 50% CL (up §Raise to 60% for ? §Would add $626,556 or 14% to Current Funding ($5,153,766 v. $4,527,210) §Options? l Increase Funding l Use Retained Funds? l Lower SIR?

PLAN Document Review §Bylaws l Joint & Several Liability? l Clean up language, incl.. Committee Roles §Revised Risk Coverage Agreement l Withdrawal, Expulsion & Reentry l Assessment l Clarify Ownership of Funds l Require Risk Management Program/Policies

PLAN Coverage Review §Memo of Coverage l Clean up & Condense l Clarify intent and definitions l Add dispute resolution §Broaden Coverage? l Employment Practices Liability l Clarify Inverse Exclusions l Attorney Fees Covered? Emotional Distress?

Managing Pool Funds § : Growth of Risk Margin Fund § : Dividends Declared § : $3.4 mil Dividend, SIR Fund Created and Net Expense = $196,000 § : Increased SIR, Loss Funding, & SIR Fund, Decreased Dividends § : SIR Fund Done? Dividends Again? Pool Nirvana?

What is Adequate Amount of Retained Funds? §“It Depends” l Aversion to Risk l Ability to Assess l Large Loss Probability l Strategic Goals §Leverage Ratios

Pool Nirvana §Assets & Interest >= Deposits + Admin §No 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 Nirvana Is it Realistic? §Other Pools Achieved? §Under what conditions? §How has the PLAN compared? §Could we achieve it now?

Pool Nirvana PLAN Results

Pool Nirvana PLAN Net Expense

Pool Nirvana Without SIR Fund

Net Expense SIR Fund Comparison

Pool Nirvana Should It Be a Goal? §Other Uses of Funds l Dividends l Reduce Funding l Increase SIR l Increase Occurrence Limit l New Programs or Coverages l Increase Services - esp.. Loss Control

Pool Nirvana Should It Be a Goal? §How would that change our current goals and practices? l SIR Fund = $10 mil l SIR = $10 mil? l Dividends? l Funding Credits

Pool Nirvana Reality §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 Nirvana Reality §Dividends should be used to make deposits more predictable §Help ease impact of budget fluctuations §Deposits above or below “predictable” level = payroll increase) should be based on member’s compliance with loss prevention policies and preventable losses

WOTS Analysis §Weaknesses §Opportunities §Threats §Strengths

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 Survey Top Planning Issues §Insured vs. Self-Insured Funding §Addressing Specific Loss Control Issues §Maintaining Member Participation §Setting Objectives - Long & Short Term §Benchmarking §Keeping Costs Stable

2001 Board Survey Improving Services §More On-Site Visits & Recommendations §Better Explanation of Formulas, Budgets, Services §Better Claim Reports l Graphs, Trends, etc. §Training in the Field

Challenges Identified 2001 §Bring SIR in balance with Fund §Give up dividends? §How decide if need excess insurance? §How to respond to multiple losses? §Work on updating PLAN documents §Monitor 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 training §Re-define Committee roles §Limit attorney rotation? §Improve communication between claims examiners and citizens

Strengths §Power Point Presentation is nice §Risk Management Staff §Responsiveness §Training commitment §Web site - docs available §Lower premiums v. insurance market §Proactive response to claim “incidents” §Good mix of active Board members

Weaknesses/Threats §Reactive v. proactive training §Loss of member staff talent, esp. in police, due to PERS 3% at 50 retirement §Economy - member revenue down, PLAN interest income lower. §Members have no full-time risk manager §No authoritarian presence

Weaknesses/Threats §Lack of involvement/participation §Board member succession planning §No model set of risk management policies §No re-assessment of risk management profile §Protection of asset base §Per occurrence limit enough?

§Fraud, including electronic fraud §Litigation status communication §Longer statute (2 yrs) for civil rights claims and limit time to file MSJ §Insurance market continued hardening §Diversity of member risks makes it more difficult to address needs Weaknesses/Threats

§Lack of health insurance leads to more pressure to file claims §Uninsured employees leads to Work Comp pressure

Opportunities §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 pool §Pool Nirvana §Pay dividend again

Opportunities §Fund Loss Prevention Program, including model practices and audit §Share knowledge & resources of staff and other members §Pay for Board member training §Scholarship fund for education in risk mgmt §Earthquake exposure identified

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

Recommended New Goals §Implement loss control approach l List of Model Policies l Audit of Members Policies and Practices §Reward or penalize members for participation or policies §Get alternates involved §Continue to evaluate the funding variables to update/revise Funding Policy §Draft revisions to Memorandum of Coverage