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Home My WebLink AboutFIN-09-152 - Waterloo Region Municipalities Insurance Pool - Annual UpdateREPORT REPORT TO: Councillor Berry Vrbanovic, Chair, and Members of the Finance and Corporate Services Committee DATE OF MEETING: November 16, 2009 SUBMITTED BY: Dan Chapman, General Manager of Financial Services PREPARED BY: Dan Chapman, General Manager of Financial Services WARD(S) INVOLVED: All DATE OF REPORT: November 2, 2009 REPORT NO.: FIN-09-152 SUBJECT: Waterloo Region Municipalities Insurance Pool - Annual Update RECOMMENDATION: THAT the Status Report of the Waterloo Region Municipalities Insurance Pool and the Financial Statements of the Pool as outlined in FIN-09-152 be received for information. BACKGROUND: th May 31, 2009 marked the end of the eleventh (11) year of operation for the Waterloo Region Municipalities Insurance Pool (WRMIP). Staff are pleased to report that the WRMIP continues to fulfill all expectations with regard to the benefits projected at inception – both financially and operationally. REPORT: Financial Strength of the WRMIP Attached are the WRMIP’s Audited Financial Statements for the year ending May 31, 2009 (Appendix A). The Pool currently has an unappropriated surplus in excess of $2.5 million. The two main strategic reasons for maintaining a reasonable surplus are: 1. Stability and Financial Strength of the WRMIP – allows the Pool to consider the best risk financing options available in the future and reduces the possibility of a retro-assessment levy against Pool members. 2. Stability of Budget – allows the municipalities to strategically manage potential future insurance market price fluctuations. 2009/2010 Operating Budget On June 5, 2009, the Advisory Board passed the WRMIP’s Operating Budget of $4,867,022 for the year June 1, 2009 to May 31, 2010. As it is anticipated that the Pool will earn approximately ë ó ï $423,000 in investment income, the net expenditure will be $4,444,022. The Advisory Board also passed a motion to increase the levy by the Pool from $4,315,390 to $4,444,022. This 3% increase will result in the Pool having a balanced budget for the year 2009/2010 and the Pool should not have to draw from surplus unless incurred claims exceed the pre-funded level of $1,953,000. The following is a summary of operations: Item Amount Pre-funded Losses $1,953,000 Administrative$650,052 Expenses Insurance Premium $2,263,970 Total Operating Budget $4,867,022 Investment Income- $423,000 Net Operating Budget$4,444,022 2009/2010 Levy $4,444,022 Levy Distribution Oliver Wyman, the Actuaries for the WRMIP, have allocated costs across the municipalities on an actuarially determined basis, utilizing considerations for exposures (including physical assets, vehicles, services and employees), claim frequency and claim severity. These changes are reflected in the levies assessed. The 2009/2010 annual levy for the City of Kitchener is $1,132,025. For comparison purposes the previous 2008/2009 levy that was assessed was $1,113,125, representing a year over percentage change of -1.7%. Insurance Market Conditions In 2009 the Advisory Board, acting upon the advice of the Pool’s insurance broker Marsh Canada Limited, decided not to put the Pool’s insurance program out to market due to the cost to do so and the poor results obtained in 2008. As such, it was determined that the most appropriate method was to negotiate the best available renewal terms with the incumbent the Frank Cowan Company. This was done and the results turned out to be satisfactory with the Pool receiving a 7.3% increase over the expiring terms with the enhancements of an additional $15M in Errors & Omissions Liability Insurance coverage and $50M in additional Property and Boiler & Machinery Insurance coverage areas. Unfortunately municipal liability insurance coverage is an exposure area that not all insurance companies are interested in underwriting. In 2008 Marsh’s marketing efforts provided the Advisory Board with four quotes to compare from the twelve insurance companies that were approached. The results were analyzed and the incumbent the Frank Cowan Company Limited was deemed to provide the most comprehensive and cost effective program. Staff will continue to monitor the insurance marketplace to ensure that the Pool obtains competitive pricing on the insurance that it purchases. Joint and Several Liability Reform The Association of Municipalities of Ontario has prepared a “Draft Paper” on the issue of Joint and Several Liability Reform. The Waterloo Region Municipalities Insurance Pool fully supports AMO’s initiative as, if successful, it would provide some relief to the devastating financial effects currently imposed on municipalities. This is an important and timely initiative. ë ó î The joint and several provisions of the Negligence Act, indicate, “Where damages have been caused or contributed to by the fault or neglect of two or more persons,and, where two or more persons are found at fault or negligent, they are jointly and severally liable to the person suffering the loss or damage…” Also known as the 1% rule, the joint and several provisions may oblige a defendant, which is only 1% at fault, to pay the plaintiff’s entire judgment. For example, if a person is catastrophically injured in a motor vehicle accident which is 90% the fault of the driver of the vehicle and 10% the fault of the municipality for failing to maintain the road, both the driver and the municipality are liable for 100% of the plaintiff’s damages. However, if those damages are assessed at $6 million, and the driver has only $1 million of insurance, then the plaintiff can recover $5 million from the municipality, notwithstanding that it was only 10% at fault. Although the municipality should only have paid $600,000 and has the right to recover the $4.4 million overpayment from the driver, the judgment is worthless if the driver has no assets other than the $1 million insurance policy. The main benefit is for plaintiffs and provides them with the best opportunity to be fully compensated. Without it, plaintiffs, often innocent victims, might be limited in their ability to recover damages. However, the main problem is fairness for defendants. It is unfair for a defendant whose degree of fault is minor, when compared to that of other defendants, to have to fully compensate a plaintiff should the other defendants be impecunious. The effect of joint and several liability is it can put pressure on municipalities to avoid protracted expensive litigation by settling for amounts that may be excessive, or certainly represent a greater percentage than their degree of fault. FINANCIAL IMPLICATIONS: N/A CONCLUSION: On June 1, 1998 all eight municipalities in Waterloo Region joined the Waterloo Region Municipalities Insurance Pool. This innovative risk-financing venture continues to be a highly effective method by which the municipalities have enjoyed: Pro-active risk management services and strategic control of claims Stability in insurance pricing. (History: the combined premiums paid by the municipalities in 1997/98 (Pre-Pool) was $4,128,448. Now 11 years later the premium levy assessed by the WRMIP in 2009/10 is $4,444,022 which is only a 7.6% increase over that original amount) The ability to earn investment income on the pre-funded claim reserve (2009 - $423,000) The pre-funded claim reserve that is not required to pay claims remains in the municipalities’ $2,583,338 surplus. (Unappropriated Surplus as of May 31, 2009 is . Further, a $1 million dividend was issued to the member municipalities back in 2001.) ACKNOWLEDGED BY: Dan Chapman, General Manager of Financial Services & City Treasurer ë ó í ß°°»²¼·¨ ß Ì¿¾´» ±º Ý±²¬»²¬ Auditors’ Report.................................................................................. 1 Balance Sheet..................................................................................... 2 Statement of Income and Unappropriated Surplus............................. 3 Statement of Cash Flows.................................................................... 4 Notes to Financial Statements............................................................ 5 ë ó ì É¿¬»®´±± Î»¹·±² Ó«²·½·°¿´·¬·» ×²«®¿²½» Ð±±´ ß°°»²¼·¨ ß Auditors’ Report Replaced with Auditors Letter from KPMG To the Advisory Board of the Waterloo Region Municipalities Insurance Pool: Waterloo Region Municipalities Insurance Pool We have audited the balance sheet of the as at May 31, 2009 and the statements of income and unappropriated surplus and cash flows for the year then ended. These financial statements are the responsibility of the Waterloo Region Municipalities Insurance Pool management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position Waterloo Region Municipalities Insurance Pool of the as at May 31, 2009 , and the results of its operations and cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. Waterloo, Canada ………………….. Chartered Accountants 1 ë ó ë É¿¬»®´±± Î»¹·±² Ó«²·½·°¿´·¬·» ×²«®¿²½» Ð±±´ ß°°»²¼·¨ ß Balance Sheet As at May 31 2009 2008 ASSETS $2,209,452 Funds held by City of Kitchener (note 2) $ 5,462,870 Due from member municipalities 19,32716,119 853,081 Accounts receivable and accrued interest 799,060 1,784,151 Insurance recoverable (note 4) 1,333,726 Investments (note 3) 7,384,3768,440,002 $12,250,387 $ 16,051,777 LIABILITIES Unearned premiums 04,315,393 0 Funds owed to City of Kitchener (note 2) 0 148,297 Accounts payable and accrued expenses 121,070 Provision for unpaid claims and adjustment expenses (note 4) 9,518,7528,046,947 9,667,04912,483,410 SURPLUS Unappropriated (note 6) 2,583,3383,568,367 $12,250,387 $ 16,051,777 See accompanying notes 2 ë ó ê É¿¬»®´±± Î»¹·±² Ó«²·½·°¿´·¬·» ×²«®¿²½» Ð±±´ ß°°»²¼·¨ ß Statement of Income and Unappropriated Surplus Year Ended May 31 20092009 2008 ActualBudget Actual INCOME Subscriber levies $4,315,390$4,315,390$4,110,750 72,11382,800 Reimbursement of adjuster expenses 59,670 4,387,5034,398,190 4,170,420 EXPENSES 2,921,1052,000,000 Claims and adjustment expenses incurred 1,094,078 (including provision for unpaid claims and adjustment expenses – note 4) 2,120,8832,111,400 Insurance premium 2,097,323 Operating expenses 423,034 435,094 Salaries, wages and benefits 391,582 Professional fees 358,068 208,558172,526 51,408 66,138 Other administrative expenses 55,073 5,874,4984,821,1903,810,582 (1,486,995)(423,000) Operating income (loss) 359,838 Investment income 501,966423,000475,892 EXCESS OF INCOME OVER EXPENSES/ (EXPENSES OVER INCOME) (985,029)0835,730 UNAPPROPRIATED SURPLUS, beginning of year 3,568,3673,568,3672,732,637 2,583,3383,568,367 3,568,367 Dividend (Note 6) 00 0 UNAPPROPRIATED SURPLUS, end of year $2,583,338$3,568,367 $ 3,568,367 See accompanying notes 3 ë ó é É¿¬»®´±± Î»¹·±² Ó«²·½·°¿´·¬·» ×²«®¿²½» Ð±±´ ß°°»²¼·¨ ß Statement of Cash Flows Year Ended May 31 2009 2008 Operations $(985,029) Excess of income over expenses/(expenses over income) 835,730 Changes in non-cash working capital components: (57,229) Accounts receivable (91,025) Accounts payable and accrued expenses 27,227(49,714) (450,425) Insurance recoverable 910,833 1,471,805 Provision for unpaid claims and adjustment expenses(2,143,096) Deferred Premiums (4,315,393)4,315,393 (4,309,044) Cash provided by (applied to) operations 3,778,121 Investing 1,055,626 Purchase of investments, net of redemptions 1,906,694 Decrease (increase) in funds held by the City of Kitchener 3,253,418(5,684,815) 4,309,044 Cash applied to investing (3,778,121) Net change in cash during the year - - - Cash, beginning of year - Cash, end of year $ - $ - 4 ë ó è É¿¬»®´±± Î»¹·±² Ó«²·½·°¿´·¬·» ×²«®¿²½» Ð±±´ ß°°»²¼·¨ ß Notes to Financial Statements May 31, 2009 The Waterloo Region Municipalities Insurance Pool (“Pool”) was formed June 1, 1998, by agreement of the eight member municipalities (“subscribers”) to purchase property damage and public liability insurance on a group basis and share a retained level of risk. The subscribers pay an actuarially determined annual levy to fund insurance, pre-fund expected losses and contribute to a surplus. ïò Accounting Policies Basis of Presentation: a. These financial statements have been prepared in accordance with Canadian generally accepted accounting principles. Since precise determination of many assets and liabilities is dependent upon future events, the preparation of periodic financial statements necessarily involves the use of estimates and approximations. These have been made using careful judgments. Actual results could differ from these estimates. Investments: b. Bonds and short-term investments are carried at cost, net of accumulated amortization on premiums and discounts. Premiums and discounts are amortized on an effective-yield basis over the term to maturity. Interest income is recorded as it accrues. When the value of any bond is identified as impaired, the carrying amounts are adjusted to estimated realizable amounts and any adjustments are included in investment income in the period the impairment is recognized. Provision for unpaid claims and adjustment expenses: c. Provision has been made for the estimated liability for all reported and outstanding claims using a case-basis evaluation plus an amount for adverse development and for claims incurred to May 31, which have not yet been reported to the Pool. Expected insurance recoveries on claims liabilities are recognized as assets on the same basis. The computation of these provisions takes into account the time value of money using discount rates based on projected investment income from the assets supporting these provisions. Insurance Recoveries: d. The Pool records insurance recoveries balances on the balance sheet on a gross basis to indicate the extent of credit related to insurance, and records its obligations to claimants on a net basis in the statement of income to indicate the results of its retention premiums written. Amounts recoverable from insurers are estimated in a manner consistent with related claims liabilities. îò Funds Held by the City of Kitchener The Pool’s short-term funds are held by the City of Kitchener and are invested in combination with other short-term funds of the City. The types of investments permitted are governed by the Municipal Act and its regulations. All investments are short-term and include, in varying proportions, cash, bank or trust company deposit notes and acceptances, federal and provincial notes and savings bonds, and pooled investment money market funds meeting the legislated investment limitations. 5 ë ó ç É¿¬»®´±± Î»¹·±² Ó«²·½·°¿´·¬·» ×²«®¿²½» Ð±±´ ß°°»²¼·¨ ß Notes to Financial Statements May 31, 2009 Investment income is allocated to the Pool based on the average yield earned monthly (ranging from 1.27% to 3.45%) on all short-term investments and the average amount owing to the Pool. íò Investments The investments consist of: 20092009 20082008 CostMarket CostMarket ValueValue 499,195528,127 City of Regina, Nov 15/10 (5.3%) 499,195519,637 00 City of Kingston, Jul 17/08 (4.25%) 498,550500,755 166,196175,975 New Brunswick MFC, Jul 28/12 (4.90%) 166,196175,250 512,700548,693 Province of Ontario, Dec 2/12 (5.375%) 512,700531,081 1,129,2591,818,280 Province of Manitoba, Apr 14/10 (5.0%) 1,129,2591,704,048 148,867152,955 Province of New Brunswick, Dec 2/09 (4.50%) 148,868152,794 745,425783,866 City London, June 30/11 (5.00%) 745,425781,995 498,850536,120 Region of York, Jul 5/12 (5.25%) 498,850523,550 00 Royal Bank, July 22/10 (3.10%) 500,000498,324 Province of Manitoba, Sept 15/10 (3.25%) 00 500,000498,152 Farm Credit Canada, Dec 5/07 (4.00%) 00 200,000199,632 Alberta Capital, June 23/08 (4.35%) 00 289,554326,509 Royal Bank, April 11/18 (5.45%) 510,400527,989 510,400512,578 Bank of Nova Scotia, Jan 31/13 (5.30%) 507,400525,339 507,400507,988 Bank of Nova Scotia, Jan 31/13 (5.30%) 494,262510,629 494,262493,764 999,0001,000,000 CIBC, June 1/09 (4.25%) 999,000999,004 294,235292,107 North Bay, Dec 6/13 (4.95%) 294,235291,902 283,176294,808 RBC, Aug15/12 (5.29%) RBC, June 6/12 (5.09%) 338,182346,633 New Brunswick, Mar 12/18 (4.45%) 337,620334,344 7,464,7678,375,865 8,493,8949,216,962 Less Accumulated amortized premium on 80,391 purchase 53,892 7,384,3768,375,865 8,440,002 9,216,962 Investments are stated at cost less any writedown in value, which is other than temporary. The average yield on fixed income investments held at year-end is 4.00% (2008 –4.33%). 6 ë ó ïð É¿¬»®´±± Î»¹·±² Ó«²·½·°¿´·¬·» ×²«®¿²½» Ð±±´ ß°°»²¼·¨ ß Notes to Financial Statements (continued) May 31, 2009 ìò Provision for Unpaid Claims and Adjustment Expenses These financial statements contain an estimation of the reserve for unpaid claims of the Pool. This reserve has been determined by an actuary engaged by the Pool. The reserve for unpaid claims represents the amounts needed to provide for the estimated cost of investigating and settling claims related to insured events (both reported and unreported) that have occurred on or before the balance sheet date. Determining the provision for unpaid claims, adjustment expenses and the related insurers’ share involves an assessment of the future development of claims. The process takes into account the consistency of the Pool’s claim handling procedures, the amount of information available, the characteristics of the line of business from which the claim arises and the delays in reporting claims. These provisions for unpaid claims and adjustment expenses are estimates and, as such, are subject to variability which could be material in the near term. Changes to the estimates could result from future events such as receiving additional claim information, changes in judicial interpretation of contracts or significant changes in severity or frequency of claims from past trends. In general, the longer the term required for the settlement of a group of claims, the more variable the estimates. The table below details the provision of unpaid claims and adjustment expenses by risk categories. Included are both short-settlement-term lines of business where claims are substantially paid within a year of being reported and long-settlement-term claims liabilities where claims are expected to be paid over longer periods. 2009 2008 $1,822,130 $ 1,937,375 Vehicle accident liability 7,334,896 5,755,127 General liability 361,726 354,445 Property damage $ 9,518,752 $ 8,046,947 7 ë ó ïï É¿¬»®´±± Î»¹·±² Ó«²·½·°¿´·¬·» ×²«®¿²½» Ð±±´ ß°°»²¼·¨ ß Notes to Financial Statements (continued) May 31, 2009 The activity in the reserve is summarized as follows: 2009 2008 Incurred losses $4,607,344 $5,990,369 Balance at the beginning of the year 784,924 (1,383,025) Increase/(decrease) in reserve 5,392,268 4,607,344 Balance at the end of the year Incurred but not reported losses 3,439,603 4,199,674 Balance at the beginning of the year 686,881 (760,071) Increase/(decrease) in reserve 4,126,484 3,439,603 Balance at the end of the year Reserve for unpaid claims 9,518,752 8,046,947 Insurance recoverable (see note 7) (1,784,151) (1,333,726) Net claims liability $7,734,601 $6,713,221 Insurance arrangements do not relieve the Pool of its primary liability to the subscribers. No information has come to the Pool’s attention indicating that any of its current insurers will not be able to honour their liabilities under these insurance contracts. The provision for claims liabilities is discounted using rates based on the projected investment income from the assets supporting the provisions, and reflecting the estimated timing of payments. The discount rate used in the valuation was 4.25% (2008 – 4.25%). 2009 DiscountedUndiscounted2008 Discounted Undiscounted Gross Provision $8,081,759$8,719,084$6,896,933 $7,489,809 Provision for Adverse deviation 1,436,993 - 1,150,014 - $9,518,752$8,719,084$8,046,947 $7,489,809 8 ë ó ïî É¿¬»®´±± Î»¹·±² Ó«²·½·°¿´·¬·» ×²«®¿²½» Ð±±´ ß°°»²¼·¨ ß Notes to Financial Statements (continued) May 31, 2009 ëò Recovery of adjustment expenses For certain open claims involving more than one member as defendant the Pool pays adjustment expenses on behalf of the members until the allocation of liability has been determined. Upon the allocation of liability, the Pool recovers the adjustment expenses within the individual deductibles of the members. Therefore, until the allocation of liability has been determined, the allocation of adjustment expenses and the amounts to be recovered from the members is undeterminable. For this reason no amount has been recorded in the financial statements for amounts to be recovered on these claims. The recoveries will be recorded once they are reliably determined. The total amount paid and awaiting allocation by the Pool in relation to these claims as at May 31, 2009 is $635,954 (2008 - $604,436). êò Surplus The surplus represents contributions made by subscribers and the excess of income over expenses less any dividends. The surplus may be used to fund any increased future premiums or other costs, or may be paid out to subscribers. The subscribers’ individual shares of the cumulative surplus as at May 31, 2009 are as follows: Cumulative Cumulative Surplus% ShareSurplus% Share As at Share ofofAs at of Cumulative May 31, 20082009 Deficit2009 DeficitMay 31, 2009 Surplus City of Cambridge $536,036(131,411)13.34$404,625 15.66 City of Kitchener 1,288,854(258,396)26.231,030,458 39.89 Township of North Dumfries 61,985(11,985)1.2250,000 1.94 Region of Waterloo 951,446(358,014)36.35593,432 22.97 City of Waterloo 424,803(140,749)14.29284,054 10.99 Township of Wellesley 74,132(14,574)1.4859,558 2.31 Township of Wilmot 120,852(38,338)3.8982,514 3.19 Township of Woolwich 110,259(31,562)3.2078,697 3.05 $3,568,367(985,029)100.00$2,583,338 100.00 éò Limits of Liability and Insurance The Pool funds losses for property and casualty claims between the deductible retained by each subscriber and a $500,000 pooled retention limit per claim. The Pool has purchased insurance to fund losses in excess of $500,000 on an individual claim. Prior to 2006, the Pool purchased aggregate stop loss insurance to fund total paid losses in excess of $1,500,000 in any year. 9 ë ó ïí É¿¬»®´±± Î»¹·±² Ó«²·½·°¿´·¬·» ×²«®¿²½» Ð±±´ ß°°»²¼·¨ ß Notes to Financial Statements (continued) May 31, 2009 èò Budget Figures The budget figures shown in the financial statements were approved by the Advisory Board of the Waterloo Regional Municipalities Insurance Pool at a meeting on May 16, 2008. çò Fair Value Disclosure The fair values of investments and claims liabilities are disclosed in notes 3 and 4, respectively. The fair values of other financial instruments, including funds held by the City of Kitchener, due from municipalities, accounts receivable and accrued interest, and accounts payable and accrued expenses are considered to equal their carrying values due to the nature of these investments. Comparative Figures 10. Certain of the prior year’s comparative figures have been restated to conform to the current year’s presentation. 10 ë ó ïì