The City’s current property, boiler, and machinery insurance program is through Lockton with coverage provided by National Union Fire Insurance Company of PA (AIG), Swiss Re Insurance Company (Swiss Re), Associated Electric & Gas Insurance Service (AEGIS) and Liberty International Insurance Company (Liberty). The current annual premium is $1,025,107, which includes $990,107 for $400,000,000 in insurance coverage plus an additional $35,000 for engineering fees at our power production facilities. The current policy period is July 1, 2017 through June 30, 2018.
The City’s property insurance program provides coverage for damage to City property for amounts in excess of the deductible and up to the limits stated in the policy for all perils except those specifically excluded by the policy. This insurance policy also provides coverage for City vehicles when in a City lot and damaged due to a covered peril. This insurance policy also provides boiler and machinery coverage to repair boilers or machinery that breaks for reasons other than normal wear and tear. This policy also provides coverage for contractor’s equipment owned by the City and damage caused by a covered peril.
Staff requested Lockton to obtain quotes from our current insurance carriers and any other insurance carriers that would provide property insurance coverage for the City. Lockton provided the City with a renewal proposal from the current four insurance companies for the City’s property insurance program and boiler and machinery insurance program for the policy period starting July 1, 2017 and ending June 30, 2018. The other insurance companies contacted by Lockton were not able to provided competitive quotes.
Staff also requested that Lockton approach Property markets which limit their coverage to “commercial” property in an effort to obtain an option to place the non-utility locations on a separate policy and potentially save the City premium costs. All the insurance companies approached by Lockton declined to quote coverage due to the City’s high concentration of risk, recent high-value hail losses in the region, and/or they required a high deductible for hail and wind losses.
The renewal premium rate remained the same as the current premium rate. The proposed premium of $1,007,542 is $17,565 or 2% less than the expiring premium. The 2% decrease in premiums is after staff increased the insured facility values by 1% to reflect an increase in replacement cost of the covered facilities, added the value of new Emergency Comminutions Center and eliminated the value of the Missouri City Power Plant.
AIG maintained their engineering fee at $35,000, which is the internal cost of conducting these engineering services at the Power and Light facilities. The premium for obtaining replacement power decreased from $50,000 to $25,000. The cost of Terrorism coverage decreased from$56,044 to $55,049.
The renewal proposal includes no changes in deductible or coverage.
Staff reviewed the renewal proposal and recommends accepting Lockton’s renewal proposal. The estimated premium cost for the proposed insurance program is $1,007,542. This amount is $17,565 less than the expiring premium. The proposed 2018-2019 Proposed Operating Budget includes sufficient appropriations in each Fund to cover the estimated annual premium for the renewal program submitted by Lockton..
Allocation of Premium
The proposed renewal total (effective) premium rate for is $0.158 per $100 of insurable value. The effective premium rate includes:
· Property and boiler and machinery insurance coverage;
· Terrorism coverage;
· Extra expense coverage for replacement power; and
· Adding an additional $100,000,000 layer of insurance coverage.
While the Power & Light Department is making significant progress to control losses, the premium increases incurred by the City in previous years were the result of Power & Light’s loss history and outstanding loss control recommendations. Staff uses a lower premium rate to calculate the premiums for all Funds except for the Power & Light Fund. Staff’s justification is that all other Funds should pay the average market premium rate instead of an inflated premium rate due to Power & Light’s past loss experience. The Power & Light Fund pays a higher cost to absorb the additional premiums.
Staff and Lockton concluded that a fair premium rate for all City property except Power & Light would be $0.08 per $100 of insurable value. Staff used this premium rate to allocate premiums to all funds except for the Power & Light Fund based on insurable values. The adjusted premium rate used on Power & Light insurable values was $0.151 per $100 of insurable value to generate a total annual property premium of $529,968.
The premium proposal also includes $55,050 for terrorism coverage and $25,000 for extra expense for replacement power. The Power & Light and Water Funds split the $55,050 in terrorism coverage premium as they are the most likely targets of an act of terrorism. The Power and Light Fund will absorb the $25,000 premium for extra expense coverage to purchase replacement power in the event a power-generating unit goes out of service for more than sixty days.
The Power and Light Fund will absorb the $35,000 in engineering fees. The engineering fees cover the cost of the insurers to have their loss control representative inspect the Power and Light facilities and monitor the status of previous loss control recommendations. The Power and Light Fund will also absorb the $151,000 in annual premium for the additional $100,000,000 in property insurance coverage as the prior $300,000,000 coverage limit is sufficient to cover the replacement values for the General Fund, Sanitary Sewer Fund and Water Fund property.
The attached spreadsheets show the allocations of the estimated premium among the Funds, the premium rates used to allocate the premium and a summary of insurable values.