LOCAL GOVERNMENT SELF-INSURANCE PROGRAM (LGSI)

Guidelines for Self-Insured Joint Property and Liability Pool
Financial Safety and Soundness

Adopted May 1998 by the State of Washington Joint Property and Liability Advisory Board

Purpose

These guidelines establish the financial safety and soundness guidelines for joint local government self-insured property/liability pools subject to RCW 48.62 (hereafter pools) in order to:

Provide pools with the criteria utilized by the State Risk Manager in evaluating pool financial positions;
Outline potential sequences of communication and actions by the State Risk Manager should a pool fall below the minimum or secondary financial positions defined herein.

The State of Washington Property and Liability Advisory Board recommends these guidelines for pools.

REVIEW CRITERIA:

The following criteria will be used in reviewing and evaluating a pool’s financial position and degree of potential change:

Annual and quarterly reports submitted to the State Risk Manager;
Confidence levels as determined by an Actuary;
Financial ratios – (Page 3);
Type/amount/change in or termination of stop loss coverage;
Ability of pool membership to address a cash call;
Significant increase/decrease in membership;
Claim reserve practices including discount factors;
Full extent of actual ultimate liabilities;
Change in coverages offered;
Change in self-insured retention level;
Industry rating of excess insurance company;
Change in excess insurance company;
Pool’s budget and financial statements, and financial strategy plans;
Financial position as compared to recommended levels;
Changes in claim case reserves;
Nature and scope of individual claim reserves;
Claims exceeding self-insured retention levels;
Change in pool administration/programs/staff;
Trends of above criteria.

POOL MINIMUM AND SECONDARY FINANCIAL POSITIONS

Minimum Financial Position

The minimum financial position for a pool is either:

Funded to the undiscounted, 55% confidence level for all years of operation, as determined by an actuary or;
Purchase of an occurrence-based aggregate stop loss endorsement and fully fund and accumulate funds to each year’s stop loss limits minus claim payments. The stop loss type (eg: occurrence, claims made, claims paid) and the resulting full extent of pool liability is to be identified and disclosed in insurance coverage documents and financial summaries to the membership. The purchase of claims paid and claims made policies may also need an annual actuarial evaluation of ultimate pool claims liabilities.

A pool at or trending below the minimum financial position may cause the State Risk Manager to initiate one or more of the following actions:

Initiate communications with pool administrator. Verify financial position and other issues of concern. Request pool’s plan of action, methods to be used, objectives to be achieved, time frames, and willingness of the members to pay additional assessments if required.
Establish milestones for reporting progress
Monitor results of pool’s financial performance, commensurate with degree of concern and responsiveness of pool’s plan of action
If concerns continue, renews communication with pool administrator and pool executive committee. Identify concerns and negotiates action plan with Committee to include formal objectives, action steps, time frame.
As necessary, continue communications with pool executive committee
Institute formal plan

Potential State Risk Manager remedial actions:

Increase pool assessments within normal budget period to a specified level
Immediate cash call of the membership
Purchase of occurrence-based stop loss, reduce self insured retention, purchase of specific lines of coverage, or other methods of risk transfer
Reduction in limits, increase deductible, institution of sub limits for specific perils or elimination of certain lines of coverage to reduce overall exposures.
Restrict membership
On-site monitoring by State Risk Manager
Cease and desist order.
Actuarial liability and funding determination

Secondary Financial Position

The secondary financial position for a pool is either:

Funded to the undiscounted 70% confidence level determined by an Actuary or;
Purchase of an occurrence-based aggregate stop loss policy and funded to the cumulative total of all year aggregate stop loss limits minus payments. The stop loss type (eg: claims made or claims paid or occurrence) is to be identified and disclosed in insurance coverage documents and financial summaries to the membership.

Potential State Risk Manager actions for pools at or trending below the secondary financial position:

Increase in frequency of reporting/monitoring;
Initiate communication with pool administrator to verify financial position;
Review financial plans and data from pool administrator;
Assure pool executive committee is fully informed of the financial position;
Review pool’s plan of recovery including the willingness of the members to pay additional assessments if required;
Monitor future financial performance commensurate with degree of concern and responsiveness of pool’s recovery plan.
Actuarial liability and funding determination

NOTES:

State Risk Manager may waive any requirements of WAC 82-60-060 or these guidelines as provided in WAC 82-60-070.
Actuary means any person who is qualified under WAC 284-05-060 to provide actuarial services.
Actuarial studies performed to determine ultimate claim reserves will be based on fiscal year-end data.
Pools are to follow the best practices of claim reserving and GASB/State Auditor standards in reporting their financial position.

JOINT POOL FINANCIAL SAFETY AND SOUNDNESS GUIDELINES

Financial Analysis Ratios

Equity to Self-Insured Retention:

This ratio is a measure of the maximum percentage that equity could decline due to a single loss
Recommendation – Equity 5 to 10 times the self-insured retention. A larger SIR would merit a ratio of 3.0 to 1.0.

Annual Provision for Expected Losses to Equity:

This ratio is measure of how equity is leveraged against possible rating inaccuracies.
Recommendation – A low ratio is desirable – i.e. less than 1.00 to 1.00
Second Opinion – a ratio of 5.0 to 1.0 for a new pool and .5 to 1.0 for a mature pool.

Net Reserves to Equity:

This ratio is a measure of how equity is leveraged against possible loss reserve inaccuracies
Recommendation – A low ratio is desirable – not greater than 1.5 to 1.00

Change in Member Equity:

This ratio is to determine whether an equity change merits a study of rate or funding levels.
Recommendation – More than a 10% reduction in equity merits a study of funding levels.

Change in Prior Years’ Loss Reserves

This ratio is a measure of the development in prior years’ ultimate loss reserves during the financial year.
Recommendation – Not more than a 25% increase in prior year’s loss reserves.