Risk Pools What They Are and What You Need to Know

1. Risk Pools ? What They Are and What You Need to Know Presentation to: Annual Joint Meeting: Orange Empire CPCU Chapter Orange County RIMS Chapter

2. 1 What are Risk Pools? Any program in which two or more organizations with different ownership share risks and losses.

3. 2 How are They Organized? Many ways, including: ? Trust ? Association captive ? Group captive ? Joint powers authority ? Risk retention group

4. 3 Under What Legislative Authority Do They Operate? Risk retention act: Liability Risk Retention Act, 15 USC 3901-3906 (1981 as amended 1986) California group self-insurance: Labor Code Section 3700 (b) For regulations: www.dir.ca.gov California governmental agencies: Labor Code Section 3700 (c) Government Code Section 990.8

5. 4 What Does This Leave Out? Risk purchasing groups Association joint purchasing programs

6. 5 How Does This Affect You? As a risk manager: Excellent vehicle for eliminating layers of commercial insurance Opportunity to create a vehicle to provide unavailable coverage Long-term capital accumulation As a broker: You may place coverage for a pool Your client may want to participate in a pool You may compete with a pool As an underwriter: You may provide excess coverage You may need to provide coverage that wraps around the (sometimes unusual) coverage a pool provides

7. 6 How Big a Factor are Pools? No specific data on the premium volume pools write Can dig out some information

8. 7 Risk Retention Group Premium (in Millions of Dollars) Source: www.rrr.com

9. 8 Average Premium for Risk Retention Groups (in Millions of Dollars)

10. 9 Number of Risk Retention Groups Operating by Year

11. 10 California Group Workers Compensation Programs Self-Insurance Plans website: www.sip.dir.ca.gov 25 group self-insureds listed Groups include: Auto dealers Contractors Agricultural businesses Truckers Private schools Premiums not public ($150 million+?)

12. 11 California Association of Joint Powers Authorities Pools for California public agencies Property, liability and workers compensation Annual premiums not published ARM Tech estimate: $1.2 billion+ For more information: www.cipra.org www.cajpa.org

13. 12 What Do You Need to Know? To a large extent, this depends on your perspective as a risk manager, broker, underwriter, etc. The following slides cover high points.

14. 13 What are My Questions as a Participant? What�s the first question? How do I get out? What�s the second question? Do I want to get in? Other questions: Is it assessable? If yes, how much? If no, what happens to my claims if the money runs out?

15. 14 What�s Next? Look at the formation documents: Articles of Incorporation Bylaws Key procedures This is a legal and operational review

16. 15 Then What? Go to the financials. You should look at the last two to three financial audits: If you�re told they�re secret, walk away They should be timely, audited and complete

17. 16 What Should the Financials Tell Me? Premium-to-surplus ratio Reserves-to-surplus ratio SIR-to-surplus ratio Operating expenses-to-gross premium ratio Annual growth in premium Annual growth in surplus For more information, read the NAIC publication on IRIS ratios see www.naic.org.

18. 17 Are There Other Things I Need to Get From the Operating Documents? Look for: Voting rights If you leave, what happens to equity accumulations? What does it take to change the rules? What are the long-term goals?

19. 18 How About Services? Pools often provide very good service, but not always: Claims administration Risk control Underwriting Coverage scope Reinsurance partner Finance, audit and actuarial

20. 19 Is There a Checklist of Operating Procedures I Should Know About? Governing documents and administrative contracts Government rules Insurance and coverages Accounting and finance Investment of funds Funding and actuarial standards Risk control Claims management Operations and administrative management

21. 20 Steven P. Kahn, CPCU, ARM, is a Managing Director of ARM Tech, a division of Aon Global Risk Consulting that provides risk management and actuarial consulting services to association pools and individual enterprises. ARM Tech is headquartered in Lake Forest (Los Angeles), California. � Mr. Kahn holds the CPCU and ARM designations and an MBA in risk management. He is past President of the Orange Empire CPCU Chapter, past President of the Risk Management Research Council and was the Editor of Practical Risk Management. Throughout his 25-year career, he has worked with many types of association pools in all regions of the country. � Phone: (949) 470-4341 Fax: (949) 470-4340 E-mail: steven_kahn@armtech.com Address: 23701 Birtcher Drive Lake Forest, CA 92630