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R-83-548 - 10/13/1983RESOLUTION NO. ..2P/dP/Z WHEREAS, the Council has deemed it desirable to conduct a study of the City's risks and insurance coverages, and WHEREAS, Jerry D. Todd has submitted a proposal to provide such a study, and WHEREAS, the Council wishes to accept Mr. Todd's proposal, Now Therefore BE IT RESOLVED BY THE COUNCIL OF THE CITY OF ROUND ROCK, TEXAS That the Mayor is hereby authorized and directed to execute on behalf of the City, a contract with Jerry W. Todd, a copy of such contract being attached hereto and incorporated herein for all purposes. RESOLVED this J t' W day of 0 ATTEST: RY L. ONN, Mayor City of Round Rock, Texas ..JaAti IfR DF?_ ,3ERRle D_ TO PhD, CLU, CPCU Charles E. Cheever Chair in Risk Management St. Mary's University, San Antonia, TX 78284 (512) 436 -3705 Consulting Offices: 3300 Hillcrest, Suite 120 5802 Highland Hills Terrace San Antonio, TX 78201 Austin, TX 78731 (512) 737 -3360 (512) 453 -9622 Mr. Sam Huey Assistant City Manager /Director of Finance City of Round Rock 214 E. Main Street Round Rock, Texas 78664 Dear Mr. Huey: September 3, 1983 Enclosed is a proposal for Round Rock's risk and insurance survey and coverage bidding and a copy of my qualifications to do the work. In this past year alone, I have done similar work for the City of Austin -- bidding their liability coverages- -and for the North East School District in San Antonio. While cost savings is never the most important reason to conduct a risk and insurance survey and bid coverages -- avoiding catastrophic unplanned for losses is-- nevertheless it is always of great concern. It has been my experience in the past few years, however, that significant cost savings are available, especially if like coverages are compared. The proposal I have outlined contemplates a full range of activities, including a survey, report, bid specification design, and conducting and evaluating bids. When you determine the exact details of the study you think would be appropriate, I could give you a better idea of the cost of the study. I look forward to having the opportunity to work with you on this project. Please call if I can answer any questions about the proposal. Jerry D. Todd It is agreed that Jerry D. Todd will provide the full range of services outlined in the attached proposal for the consideration of $7,500.00. EXECUTED this JERRY D. TODD cerely yours, day of October, 1983. CITY 0 By: L , Mayor PROPOSAL FOR THE CONSIDERATION OF THE CITY CIF= F JLJPFD ROCFC Regarding: AUDIT AND REVIEW OF THE RISK MANAGEMENT /INSURANCE PROGRAM AND COMPETITIVE BIDDING OF COVERAGES JERRY D. TODD, PhD, CPCU, CLU Charles E. Cheever Chair in Risk Management St. Mary's University, San Antonio TX 78294 (512) 436 -3705 Consulting Office: 3300 Hillcrest, Suite 120 San Antonio, TX 78201 September 3, 1983 STUDY OBJECTIVES AND PROCEDURES The decision of the City of Round Rock to consider initiating a comprehensive risk management audit is to be commended. An independent study can view the current program objectively and provide valuable information for establishing an effective on -going risk management function. The optimum balance should be obtained between assumption of risk levels, risk transfer techniques, purchase of excess insurance, utilization of self- insurance programs, loss prevention efforts, cash flow benefits, and effective claims management. The General Objectives of Risk Management The main function of risk management is to aid the City in achieving its overall objectives. In many business firms, these objectives are typically stated in terms of profits. Maintaining revenue flows and the ability to continue to provide services to clientel while remaining within the budget are usually more important objectives. These objectives are accomplished by preserving the City's assets, both physical and human, against accidental financial loss and by financially protecting the City so that, in case of catastrophe, it will be able to continue to function. A companion objective is to accomplish the above at a minimum long run risk cost. Two basic risk management objectives are to avoid catastrophic losses (or "Don't risk more than you can afford to lose ") and to minimize the long run cost of risk. The cost of risk includes the combined costs of insurance premiums, losses paid under deductibles, loss prevention services, uninsured losses, and general risk management expenses. Too often the primary objective of insurance programs appears to be low 2 insurance costs. In business risk management, the annual budgeted cost of insurance premiums and other risk management costs are considered secondary to the control of losses with potentially catastrophic financial impact. It is more prudent to pay annual insurance premiums which are certain in amount than to risk suffering an uncertain large uninsured loss. The proper mix of insurance premiums, deductibles, uninsured losses, and loss prevention expenses must be achieved to minimize the cost of risk. Two secondary objectives are extremely important: invest in long term loss reduction and prevention programs where justified; and provide adequate liquid funds for timely replacement of property losses and to offset liability claims without serious damage to the City budget plan. The cost of risk can be reduced in the long run only through loss prevention and reduction because they reduce actual physical losses while insurance premiums merely reflect actual losses and will not change unless there is some definable change in the losses or in potential losses. The main purpose of insurance is to provide liquidity for large losses. If insurance is not purchased, then the City must provide in other ways for liquidity to meet unexpected property or liability losses. This study will audit the existing programs (self- insurance, non - insurance, insurance and risk transfers) and identify the areas of needed improvement. This includes recommendations for changes and full utilization of risk management principles to protect the City's assets in the most cost efficient manner, consistent with service to the citizenry. Specifically, it will 3 be determined if the City is following these guidelines: 1. Establish centralized responsibility and authority for risk management. Whether an organization has 10 or 10,000 employees, the first step should be to assign responsibility for risk management to one individual. This individual could be the Treasurer, someone in general administration, or someone appointed directly by the highest executive. Regardless of the method of selection, it is important to designate one individual who then should develop some expertise in the area of risk management and insurance. 2. Provide clear written guidelines stating what is expected of every employee in relation to risk management. It is important to communicate what is expected of everyone and to assure continuity of task performance when there is employee turnover. Without such guidelines, employees and supervisors seek top management opinions before making any judgment. If top management must be consulted on every decision, then they are hindered in the performance of their more important duties. If guidelines are establish only be contacted when an exception to the guideline is indicated. This principal of "management by exception" is widely accepted as an efficient management method. 3. Avoid catastrophic losses. Based on this criterion, certain insurance coverages are essential and all other purchases are of less significance. The definitions of catastrophic must include the ability of the City to sustain loss. 4. Minimize the total cost of risk tp the City in the long -run. 4 , the top executive need Safety and loss prevention programs should be emphasized and coordinated with the insurance program so as to take maximum advantage of reduced losses which result from effective safety programs. 5. Establish an effective communications system between the risk manager,_ department heads, top executive,. and insurers The exchange of insurance - related information will supplement the written manual and aid department heads in carrying out their responsibilities. This information flow will enable the risk manager to up -date records and insure that the risk management program meets the current needs of the City. Expectations of the risk manager should also be appropriately communicated through a set of written guidelines. In addition, to encourage continued availability of insurance at reasonable rates, the risk manageer should keep insurers informed of the City's loss reduction programs. 6. Use risk assumption, self - insurance and loss reduction programs whenever feasible. All losses that can be handled as an operating expense or other wise easily assumed by the City should not be insured. Relative size and predictability of loss are important factors in risk assumption. 7. Make appropriate use of methods such as hold harmless agreements to reduce or eliminate risks. When entering into such agreements, ensure that the other party has insurance necessary to meet its commitments. Set up procedures to guarantee that such insurance coverage is 5 continually in effect. 8. Remember that a risk management and insurance program is not static. Provide a program for periodic review, making certain that the designated risk manager and the agent or agents are continually informed of all changes in operations and in property values, as well as contracts entered into by the City. 6 PROPOSED STUDY APPROACH The above objectives will be accomplished utilizing the following steps: 1. (a) Investigate all operations and assets of the City to identify all possible exposures to loss, income as well as property. (b) Analyze buildings, contents, vehicles, valuables, securities, etc., for susceptibility to damage or destruction by different perils. Adequacy of loss valuations will be investigated. (c) The maximum probable loss from any given peril will be analyzed- -i.e., total employee injuries, property damage, income loss, third party liability suits caused by disasters. 2. (a) The impact of losses on the City's finances will be determined using three criteria: impact on the financial statement and solvency; impact on the annual budget; and impact on working capital or liquid resources. Recommendations will be made as to maximum uninsured losses which the City can safely absorb. Appropriate retention levels on insured risks will be recommended. (b) Adequacy and liquidity of funding to meet self - insured losses will be analyzed. 3. The policies and practices of the City with respect to legal contracts will be examined to determine if proper use of hold harmless agreements and required insurance certificates is made. Both transfer and assumption of risk through such agreements will be examined. 7 4. A thorough analysis of all current property - liability insurance coverages will be conducted to determine the following: (a) Is the City adequately covered against catastrophic losses? (b) Are deductibles being used appropriately? (c) Have all possible causes of loss been considered? (d) Have both statutory and contractual legal requirements for insurance been met? (e) Are dollars being spent for unnecessary coverages, where self- insurance or excess coverages would be more appropriate? (f) Are coverage - broadening clauses, endorsements and riders being properly utilized- -i.e., all risk forms, replacement cost endorsements and agreed amount clauses? (g) Are current policies correctly rated and are appropriate rate credits utilized? 5. (a) Current operating procedures for risk management decision making will be investigated, Interviews with all department heads and conferences with the finance, personnel, and legal staff will indicate the current understanding of responsibility and authority for various risk management functions, Changes which incorporate modern risk management practices will be fitted to the City's particular needs. (b) A full written risk management audit report will be presented. The report will include all recommendations for risk management administration, policy coverages, risk retention limits, deductibles, and replacement coverages for all property - liability and workers' compensation risks. 6. (a) Bid specifications will be developed encompassing any approved changes in current coverages. They will then be 8 submitted to the insurance market via qualified insurance agents of the City's choice. (b) Bids will be evaluated and recommendations will be made prior to the policy renewal date. PROCEDURES 1. Starting Date: The study would begin immediately upon award of contract. 2. Information Needed: The following information will be needed during the study, most of it in the initial stages: Budgets - -all departments Financial Statements, including assets and liabilities Building values or current appraisals Inventories of contents, equipment and vehicles Copies of lease contracts, contracts for various work performed for the City and other contracts under which the City might assume liability Loss records and statistics generated Copies of all current insurance policies Descriptions of self- insurance plans Current policy by which insurance premiums and self- insured losses are allocated among departments All written documents which indicate the City's policy regarding insurance matters: i.e., responsibility, authority, accident reporting, procedures, objectives, use of deductibles, etc. 9 3. On -Site Visits: Upon review of the information requested in (2) above, visits will be made with the following individuals: Those currently dealing with insurance matters Department heads or responsible individuals within other major departments, including, but not necessarily restricted to: Administration Finance Parks and Recreation Water Utility Police and Fire Current insurance agent if needed 10