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The Total Cost of Risk

Risk Management reduces the total cost of risk to the County by combining employee safety, occupational health and wellness programs that prevent losses with effective claims management strategies that control losses, and annually evaluating which risks are transferred through insurance and which are retained by the County.

The total cost of risk represents approximately 2% of the County’s annual operating budget. It includes expenditures on loss prevention programs, such as safety trainings, wellness initiatives, and ergonomic evaluations and equipment; settlement of workers’ compensation, property, and liability claims filed against Alameda County; funding for future payments on current claims; and administrative costs of managing these programs, such as salary and employee benefits expenses, space rental, and information system costs.

FINANCING RISK

The County uses a combination of self-insurance, pooled coverage, and purchased insurance for protection against adverse losses.

The County procures excess coverage for the self-insured general liability, medical malpractice, and workers’ compensation programs through the CSAC Excess Insurance Authority (CSAC EIA), a California Joint Powers Authority (JPA) formed to develop insurance and risk management programs that address the exposures of public entities. The limits for the pooled retentions and excess coverage are evaluated with each coverage renewal to determine the optimum balance between the use of aggregate pools and the purchase of excess insurance.

The County transfers some risks through the purchase of insurance policies, with deductibles, but no pooled retention. The deductibles and limits for each pooled and insured layer are disclosed each year as a footnote to the County of Alameda Consolidated Annual Financial Report (CAFR).

Self-Insurance Programs

The funding of the self-insured programs – Workers’ Compensation, General Liability, and Medical Malpractice - which together constitute the largest portion of the risk management budget, require actuarial analyses of liabilities to predict expenditures each year and to determine the increase in liability each year for disclosure in the County’s audited financial statements.

During FY 2011, the County self-insured the first $100,000 of medical malpractice claims; the first $1 million of each general liability claim; and the first $3 million of each workers’ compensation claim.

Funding claim liabilities that will be paid in future fiscal years

Since claims incurred in one fiscal year are typically paid over several succeeding fiscal years; funds must be set aside in the current year to pay expenses in future fiscal years. The chart below illustrates the differing payout patterns for workers’ compensation and general liability claims. It takes an average of 6 years to resolve 85% of the liabilities for a general liability claim, and 14 years for 85% of liabilities to be released on a workers’ compensation claim, due to lingering liabilities for future medical benefits.

risk chart

ALLOCATING COSTS TO USERS

The State Controller requires that self-insured insurance programs hold assets in a trust fund or internal service fund to cover the cost of these future payments. The funded status of a plan is generally expressed in terms of a “confidence level”, or the probability that the present value of future claim payments will not exceed the existing assets in the fund. The confidence level of a fund can be improved by decreasing liabilities or increasing the assets in the fund. The targeted confidence level for the risk management funds is 75%. The State Controller imposes additional regulations on how costs for these programs may be allocated to departments, if costs are to be eligible for claiming under federal and State grants. The State Controller requires that costs for risk management programs that are not self-insured also be allocated in a reasonable manner.

In allocating costs for self-insured programs to users, Alameda County weights exposure to future claims by 20% and loss experience by 80%. Other risk management costs are grouped into pools and allocated to users based on what drives the costs in each pool.

State Controller’s Guidelines for Self-Insured Plans (PDF - 517kb)*. See pages 115-138 Handbook of Cost Plan Procedures for California Counties for the State Controller’s Guidelines for Grant Reimbursement of Self-Insured Plans.

Summary of Cost Allocation Methodology: Here is a summary of how the County of Alameda implements the State Controller’s Guidelines in its annual budgeting process.

* Portable Document Format (PDF) file requires the free Adobe Reader.

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