ABAG PLAN Corp. Strategic Planning Meeting October 8, 2003 Dublin, CA

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

AGENDA §Where are we now? l Progress Since Last Meeting l Issues Remaining §Where are we going? l Five-Year Plan l Next 2-5 years

Issues For Today §Digest remaining issues from last meeting §MOC and Doc Review/Discussion §Review current financial condition & ratios §Plan for funding beyond 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.

Strategic Planning Five Year Plan § :Admin & Internal Procedures l Outsourcing personnel/equip. l Claims Procedures l RiskMaster l Web site revamp § : Funding Procedures l SIR Fund growth l No dividend l Funding Policy l Actuary change

Strategic Planning Five Year Plan § : Governing Documents & Procedures l Committee Roles l MOC Issues l Claim Policy § : U/W & Risk Control Standards l RM Assessment l Model Policies l RM Funding l Incentives/Penalties

Strategic Planning Five Year Plan § : Long-term Funding Objectives l Growth? l Nirvana? l Dividends? l Expand Coverage? § : Evolution l Response to change l Customize to member l Start over with 3-5 year review cycle Where do Members want to be?

Planning Meeting Goals & Progress § 9 Goals Identified l Update Strategic Plan Annually - we’re here! l Draft revisions to MOC - today l Define Committee Roles - today l Continue to evaluate Funding Policy - today l Implement loss control approach - begun l Reward or penalize members for participation or policies - TBD l Get alternates involved - begun l Become Accredited? TBD l Staffing Plan - Continue to Update

Goals Completed by Next Board Meeting §Document Review & Revision l MOC & Bylaws l Claim Policy l Funding Policy §Implement Loss Control Approach l Risk Management Assessment - update l Risk Control Policies - Committee Role Expectations Enforcement

Issues For Next Board Meeting §SIR l Increase SIR to $10 mil? l Purchase excess insurance? Aggregate stop-loss? Re-insurance? Increase limit? l SIR Fund contribution & target ratios l Future funding goals and benchmarks

Issues for Future Board Meetings §Extent of Support for Risk Management Programs & Risk Control Policies l Risk Management Assessment progress l Required & recommended policies & programs l To what extent do we mandate policies and how do we enforce? l Funding commitment l Expand current offerings

Issues for Future Board Meetings §Long-term Funding and Stability l Growth of SIR Fund l Net Expense/Nirvana l Proactive v. reactive risk control l Customizing to each member l Target funding to member need l Role of excess or reinsurance

Item 5. Document Review Goals §Memorialize current practices & understanding §Agree on future characteristics and practices of the pool §Clear idea of what members want to achieve l Memorandum of Coverage l Bylaws l Claim Policy

Item 5. Document Review Bylaws §Committee Roles and Responsibilities l Risk Control & Underwriting Committee Police Public Works? l Actuary Committee l Claims Committee l Finance Committee? l Executive Committee §Clean up items

Item 5. Document Review Claim Policy §Objectives l Maintain sufficient resources to manage claims l Provide experienced legal counsel to defend covered claims l Resolve disputes in a fair and cost-effective manner §Authority Levels §Reporting Requirements §Performance Standards

Item 5. Document Review Claim Policy §Claims Management l Claims Examiner designated for each Member l Claims Liaison designated by Member l Tailor claims management program l Commitment to training l Audit at least every two years

Item 5. Document Review Claim Policy §Defense Counsel List l Maintained by Claims Committee l Must use for covered claims l Litigation Management Guidelines apply §Coverage Determination l Risk Manager/Coverage Counsel l Appeal Process: Claims - Exec - Board l Beyond that?

Item 5. Document Review Claim Policy §Settlement Authority l Member = PD only up to 10% of Deductible l Claims Manager = $50k > Ded. & Defense l Risk Manager = $100k > Ded. & Defense l Claims Committee = > $100k & Ded. & Def. §Reporting Requirements l To/From Member and Committee §Program Performance/Audit Standards

Item 5. Document Review Memorandum of Coverage §Objectives l Address new risks and coverage changes l Solicit member input and intent l Condense & simplify language l Align language with understanding & practice l Inform members of coverage nuances and gap analysis of excess coverage

Item 5. Document Review Memorandum of Coverage §Covered Parties l Deal with auto - permissive use l Include PLAN & Board? l Duty to defend/indemnify when member can’t Exclude parties due to intentional tort or conflict of interest, per G.C , 825.6, 995, 996.6?

Item 5. Document Review Memorandum of Coverage §MOC Declarations l Include Additional Covered Entities (v. End.?) l Limit = $5 Mil per Loss §Excess Declarations l Named Insured Includes ABAG PLAN Corp. l Limit = $5 Mil per Occurrence, Wrongful Act, or Employee Benefit Wrongful Act. l Aggregate $5 Mil Limit: Prod./Ops., E&O, Employee Benefit Liability

Item 5. Document Review Memorandum of Coverage §Definitions (xs pp. 3-12) l BOLD throughout in revised MOC l Add “Damages”? l Dam - def. & excl. in excess is broader l BI include ED? xs does l PI - xs includes AI, wrongful eviction & assault and battery but restricts civil rights to privacy. MOC PI limited to emotional distress. l Pollutants - ag. & stormwater? XS excl. sewer l Ultimate Net Loss - revise/ERISA, etc.

Item 5. Document Review Memorandum of Coverage §Who is An Insured? (XS pp ) l A.-C. Similar to MOC, but includes ABAG PLAN & its Board l D. Any & all JPAs representing any named insured. Broader than MOC. l Section E. for auto exposure - add to MOC? l MOC adds “others” via contract ops/facilities

Item 5. Document Review Memorandum of Coverage §Insuring Agreements (p. 1) l MOC has 4 - PD, BI, PI, E&O l XS has 3: PD/BI, E&O, EBL l EBL = E&O in the administration (counseling, handling records, enrolling or terminating participants) of the program MOC much broader? (p. 31 excl. n.) l Reference to “insured contract” in XS PD/BI MOC covers via def. of Covered Parties Subject of additional insured endorsements

Item 5. Document Review Memorandum of Coverage §Exclusions - condense to one set l Failure to comply with terms of grant, subvention, or other benefit (ex - block grants) l Money damages based on failure to comply with any regulation, law, etc.? l Inverse - combine in to one and add exception include failure to maintain see XS policy and practice Exclude diminution of value.

Item 5. Document Review Memorandum of Coverage §Exclusions - continued l Pollution - add sudden & accidental exception? see XS but also def. of pollution group purchase? see quote in handout l Hospital/Airport - add clinics, etc. XS does l Transit Service - shuttle OK? l Medical Services Beyond EMT? Mgmt.? Police? Ambulance l Watercraft - define & add excl.

Item 5. Document Review Memorandum of Coverage §Exclusions - continued l Employment Practices Liability Excluded in MOC, covered in excess policy Cover vicarious liability of employer? l Employee Benefit Plans Exclude all? Revise ERISA excl. in def. of UNL Only for unlawful discrimination? (MOC ex.) Excess covers Employee Benefit E&O –excludes ERISA –excludes insufficiency of funds (u.)

Item 5. Document Review Memorandum of Coverage §Exclusions - continued l Bidding/contracting: add project mgmt.? l Terrorism - excluded by excess insurance l Land Subsidence - excluded by xs l Mold ? Asbestos? l Financial Instruments/Investments l Montrose - continuous/stacking exposure

Item 5. Document Review Memorandum of Coverage §Defense l Maintain duty to defend (v. right only) l Delete reference to 2860, keep Cumis obligations and responsibilities l Apportionment of fees, covered & not? §Conditions l Prevent stacking, progressive PD, EQ, storm l Not “Other” Insurance l Process for resolving disputes (xs binding arb.)

Item 5. Document Review Memorandum of Coverage §Process for resolving disputes - goal l Prevent a judge or jury from interpreting coverage in a manner that is inconsistent with the intent of the Members or that threatens the financial viability of the pool. l Who should have the final say?

Item 5. Document Review Memorandum of Coverage §How will MOC be interpreted? l MOC is not insurance l Rely on intent of the parties l Rely on case law to what extent? §How will disputes be resolved? l Intersection with Claim Policy l Board decision final? l XS has binding 3-person arbitration

Item 5. Document Review Memorandum of Coverage §This Memorandum of Coverage does not provide insurance, but instead provides for pooled risk sharing. This Memorandum shall be applied according to the principles of contract law, giving full effect to the intent of the Members, acting through the Board of Directors, in adopting this Memorandum of Coverage. However, coverage decisions involving the interpretation of language within this Memorandum that is similar to standard commercial general liability insurance will be based, where applicable, on California case law interpreting such liability insurance contract language.

Review & Discussion of Suggested Topics & Changes §MOC §Bylaws §Claim Policy §Other

Item 7. Management of Retained Funds §Current Financial Condition §Funding Policy & Benchmarks

Balance Sheet Comparison

Income Statement Comparison

Program Funding as of 6/30/03 §Liability Program - $37.6 Mil Assets l $11.2 Mil Total Liabilities (50% CL) l $25.7 Mil Retained Earnings l Over deductible paid = $3.25 Mil §Property Program - $2 Mil Assets l $157,500 Total Liabilities l $1,925,725 Retained Earnings l Over deductible paid = $232,707

What is Adequate Amount of Retained Funds? §“It Depends” ( See WA State Review Criteria) l Aversion to Risk l Ability to Assess l Large Loss Probability l Strategic Goals l Changes in SIR, coverage, reserving, actuary §Leverage Ratios

Funding Policy Benchmarks* Financial Ratio Numbers: §Net Deposits = $4.0 Mil §Total Liabilities = $11.2 Mil §Total Fund = $25.7 Mil §SIR = $5 Mil §SIR Fund = $19.5 * Including standards used by WA State and MI Municipal Insurance League (MML) - see handout

Funding Policy Benchmarks §Yearly Deposit at least 50% CL l Goal = 70%. Current Funding at 50%. §Total Fund to SIR ratio at least 2:1 l Goal = 3:1. Current = 5:1 §Maintain SIR Fund = PLAN SIR l Goal = $10 Million. Current = $19.5 Mil §Maintain Risk Margin Fund at 90% CL l Current = $17.4 Mil. Total Assets = $37.6 Mil.

Total Fund to SIR §Measures Conservatism in Self Funding - maximum Fund would decrease from one loss. §Pools typically at 5:1 to 15:1. A larger SIR would merit a ratio of 3.0 to 1.0 (WA State Guide). MML benchmark = 10 or more, current = 36.8:1 §PLAN ratio is 5:1 ($25:$5 Mil) l Exceeds Funding Policy Goal of 3:1, Min. = 2:1 l Up from 3.8:1 last year XRaise goal from 3:1 to current 5:1 and minimum from 2:1 to 3:1

Yearly Deposit to Total Fund §Measures exposure to pricing errors. If PLAN underprices loss funding subsequent poor loss experience would impact Fund. Also measures growth potential supported by Fund §A low ratio is desirable - i.e. less than 1:1 l New Pool 5:1; Mature Pool.5:1 (WA Guide) l MML benchmark: 1.0 or less, current.79:1 §PLAN ratio is.16:1 (4:25.7) l No benchmark in Funding Policy l Keep at.25:1 or less

Loss Reserves to Total Fund §Measures the potential impact on solvency of under reserved losses. The higher the ratio the more critical reserves be accurate. §Pools typically at 0.4:1 to 2.5:1 §Low ratio desirable, < 1.5:1 (WA), < 3:1 (MML with current ratio 2:1) §PLAN ratio is.44:1 ($11.2:$25.7) XAdd benchmark: minimum 1.5:1 or less, goal of 1:1 or less.

SIR Fund to SIR §Unique to PLAN §Minimum Ratio = 1:1 §Goal $10 mil - current = $19.5 mil §Current Ratio = 19.5:5 = 3.9:1 §Up from 9.6:5 = 1.92 XRaise minimum from 1:1 to 2:1 with goal of 3:1 (current = 3.9:1)

Change in Fund, Reserves or Funding §Fund: More than 10% reduction merits a study of rate or funding levels. l $19.3 to $25.7 Mil change = 32% Increase §Reserves: No more than a 25% increase in prior year’s loss reserves l $15.8 to $11.2 Mil change = 29% Decrease §Funding: No more than 10% Increase l PLAN funding increase = 0.6%

Funding Goal = 70% CL §Currently at 50% CL §Raise to 70% for ? §Would add $660,000 or 16% to Current Funding ($4,720,000 v. $4,060,000) §Options? l Increase Funding l Leverage Retained Funds? l Lower SIR?

Suggested Funding Benchmarks §Fund to SIR - raise goal from 3:1 to current 5:1 and minimum from 2:1 to 3:1 §SIR Fund to SIR - raise minimum from 1:1 to 2:1 with goal of 3:1 (current = 3.9:1) §Loss Reserves to Fund - add benchmark minimum 1.5:1 or less, goal of 1:1 or less. (current =.44:1) §Others? Limit Deposit to 10% increase?

Evolution of PLAN Funding § : 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 § : Decreased SIR, XS Ins., SIR Fund Growth: no dividend, actuary change. §2003 & Beyond: SIR Fund Higher? Dividends? Leverage? Nirvana?

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 * * 03 New Actuary

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.. Risk 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 used to make deposits more predictable §Help ease impact of budget fluctuations §Fund more services for members XDeposits above or below “predictable” level = payroll increase) should be based on member’s compliance with loss prevention policies and preventable losses

Item 8. Review, WOTS & Objectives §Trends & Market Conditions §Review of prior meetings §Weaknesses §Opportunities §Threats §Strengths §Objectives

Trends and Funding Issues §Insurance Market Flattening? §Coverage terms stabilizing §Funding goal is to increase to 70% CL  §PLAN Document & Coverage Review  §Liability of PEs increasing l Inverse, pursuit, attorney fees l State budget & government by special interest

Future Trends Interest Rates §Still at record lows §Using 4.0% vs. 4.5% last year (5% prior) l 0.5% drop increased $40,000 and “increased” outstanding liabilities §No immediate pressure to increase §Possible Deflation §Any Estimates?

Future Trends §Your Budgets? §Your Concerns?

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  Equity Distribution l Risk Management Staff l Responsiveness l Training commitment l Web site - docs available l Proactive response to claim “incidents” l Good mix of active Board members

Prior Planning Meetings §Weaknesses & Threats * Complacency & lack of flexibility in responding to change * Lack of some member involvement/connection * Short-term vs. long-term thinking (i.e. equity expectations) * Pressure to reduce costs * Bad Loss Trends - large loss(es) impact on equity/surplus * Bring SIR in balance with Fund * Give up dividends? * How decide if need excess insurance? * How to respond to multiple losses? * Keep up on new member risks (mold) * 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.

Prior Planning Meetings §Weaknesses & Threats l Members have no full-time risk manager l No authoritarian presence l Board member succession planning l No model set of risk management policies l No monitoring or re-assessment of risk management profile l Protection of asset base l Per occurrence limit enough? l Fraud, including electronic fraud l Litigation status communication l Longer statute (2 yrs) for civil rights claims and limit time to file MSJ l Insurance market continued hardening l Diversity of member risks makes it more difficult to address needs l Lack of health insurance leads to more pressure to file claims l Uninsured employees leads to Work Comp pressure

Prior Planning Meetings §Opportunities & Objectives l Sharing good ideas & “Best Practices” l Growth of pool l Pool Nirvana l Pay dividend again l Workload/staffing balance – keep services up. l Emphasize training l Re-define Committee roles l Limit attorney rotation? l Improve communication between claims examiners and citizens l Risk Management Programs (like sewer program) lead to better ID of where money is spent and lead to more money to fix.

Prior Planning Meetings §Opportunities & Objectives l More On-Site Visits & Recommendations l Better Explanation of Formulas, Budgets, Services l Better Claim Reports - Graphs, Trends, etc. l Training in the Field l Fund Loss Prevention Program, including model practices and audit l Share knowledge & resources of staff and other members l Pay for Board member training l Scholarship fund for education in risk mgmt l Earthquake exposure identified

2003 Strengths §

2003 Weaknesses §

2003 Threats §

2003 Opportunities §

2003 Board Goals & Objectives §

9. Other Business §Comments? §Questions? THANK YOU!