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UC DAVIS:VICE CHANCELLOR--ADMINISTRATION August 13, 2002 DEANS, DIRECTORS, DEPARTMENT CHAIRS AND CAMPUS ADMINISTRATIVE OFFICERS RE: THE REGENTS INSURANCE PROGRAM FOR 2002-2003 I would like to advise you of the outcome of the insurance program renewal for July 1, 2002 through June 30, 2003. This was a very difficult renewal due to the continued hardening in the insurance market, which was further exacerbated by the events of September 11. This year UC experienced a 107% overall increase in the commercial insurance program premiums. The difficulty of this renewal was also reflected in decreased coverage capacity in the insurance market, more restrictive terms and conditions of coverage, reductions in coverage and higher self-insured retentions and deductibles. Insurance underwriters are scrutinizing all accounts and are taking a closer look at the risk exposures and appropriate premium pricing and selection of risk they will cover. Substantial increases in premiums are being seen throughout the insurance market and insurers are unwilling to negotiate or are declining to quote coverage if an accurate picture of the exposure cannot be provided. Insurers continue to be affected by low investment returns, record high natural catastrophe losses, high loss cost trends, adverse development from prior year losses and restrictions in the reinsurance market. Most lines of coverage have now excluded terrorism. Offers to buy back terrorism coverage would be limited and at an extreme price. Office of the President Senior Management decided not to purchase terrorism coverage for the University's excess property and liability programs given the costs and the level of risk for the University. Given the bad news state of the insurance market, it's good news that UC Davis recognizes insurance is simply a way for the campus to finance post-loss costs. With the campus now bearing these costs of loss, the risk management process also offers pre-loss options to avoid, transfer (move risk to another party), hedge (leverage current activity against future requirements) or retain and manage (reduce risks through appropriate internal controls) the risks inherent in higher education. With the following changes to the University's insurance program, I urge you to contact Deborah M. Luthi, Director, Risk Management Services for guidance in identifying the risks associated with your objectives and managing these risk in order to reduce or prevent property and liability losses, as well as enhancing educational and business opportunities. Excess Property While UC has maintained excellent loss experience for many years, during the 2001-02 year the University incurred two significant fire losses totaling approximately $14 million. This along with the insurance market conditions, the property losses suffered by insurers from the September 11 events, and reduction in market capacity made for an extremely difficult placement of insurance. The renewal of the Excess Property resulted in a 180% increase in premium from $2,500,000 to $7,020,000. Due to the diminished market capacity and the substantial premium increase, it was necessary to reduce the policy limit. The major program changes and some of the restrictions imposed include the following: *Self-insured retention increased from $2.5 million to $5 million. *Aggregate increased from $3.5 million to $15 million. *Deductible for losses after the aggregate is eroded has increased from $100,000 to $1 million per occurrence. *Policy limit reduced from $1.2 billion to $500 million. *Business Interruption coverage has been eliminated. *Fine Arts sublimit of $50 million. Note: This sublimit means coverage for Fine Arts under this policy will be limited to $50 million per occurrence. One $50 million limit will apply to both scheduled (excess of $50 million underlying policy) and unscheduled (excess of $5 million SIR) fine arts. *Policy territory is limited to within the U.S. and based on locations in statement of values provided to underwriters at inception. Coverage is no longer extended to worldwide. *Coverage for any newly acquired or constructed property may be subject to reporting requirements and a reporting threshold. We are currently working with underwriters to define the reporting parameters. This coverage is more restrictive compared to coverage in the past that afforded automatic coverage. *Exclusions for Mold, Terrorism and Asbestos. Miscellaneous Property The Miscellaneous Property Program has been extended for 60 days and Office of the President Risk Management must market this program. This policy covers direct damage on bond indentured properties, debt service, rental interruption, mortgage payments, and business interruption for bookstores. Due to the two significant fire losses impacting this program, UC anticipates this will be a difficult program to place. The program will be thoroughly reviewed and coverage will be secured for that which the University is legally obligated to do so. Business Interruption for the bookstores was secured some time ago when the market was soft and underwriters were willing to include this coverage in the Miscellaneous Property policy. As of September 1, 2002, this optional coverage for business interruption will cease. However, the UC Davis bookstore previously chose not to purchase this coverage. Excess Liability The Excess General/Auto and Professional (Medical Malpractice) Liability was renewed at current policy limit of $275 million. This program was renewed with 72% increase in premium from about $3 million to $5.2 million. The self-insured retention has increased from $5 million to $7.5 million for each program. The $5 million SIR has been in place since 1989-90 for GL/AL and 1990-91 for Professional Liability. The Underwriters had initially quoted the $7.5 million SIR for indemnity only and we were able to negotiate the SIR to include both indemnity and expense. In addition, the aggregate on the self-insured retention has been eliminated. The premium increase can be attributed to the market conditions as well as several medical malpractice carriers withdrawing from the market creating an increased demand, which drove the price upwards. During the past few years the University has triggered insurance coverage above the $5M SIR and exceeded the aggregate loss thresholds included in the policies. The University will collect approximately $8.5 million from the excess liability insurers. In addition, there has been increased reporting of litigation that could potentially impact the Bermuda (XL and Ace) upper layers of insurance, such as class action cases involving mold, willed body, and medical malpractice. Crime Chubb (Executive Risk), the incumbent primary carrier, would not quote with less than a $1 million deductible and reduced their policy limit from $10 million to $5 million. There were no other carriers willing to quote on the primary layer. To maintain the current $20 million in limits for employee dishonesty, the first $5 million was renewed with Chubb (Executive Risk), the second $5 million purchased through Kemper and another $10 million with Zurich. The premium for the $20 million in limits increased 38% from $225,000 to $310,000. Other options were to increase the deductible to $2 million or $2.5 million. Since the campus/medical center is responsible for the entire deductible, it was critical to maintain the $1 million deductible. Aviation Aviation insurance was initially quoted with a 50% increase, which was negotiated down to a 38% premium increase from $94,039 to $129,089. Ace USA continues to be the primary carrier, but due to their reduction in capacity Ace was only able to provide $50 million in limits and London is providing the additional $30 million for a total of $80 million in limits. This includes War, Hi-Jack and other Perils coverage for the Owned and Non-Owned aircraft exposure. Marine UC renewed the primary $25 million Marine insurance through Navigators Insurance Company at a 3.8% increase in premium which includes the addition of a major vessel at UC Santa Barbara. A terrorism exclusion was attached and Navigators will provide the limited buy back endorsement at no additional premium to the University. The loss ratio has significantly decreased from 185% to 5% which is attributed to elimination of the "over-the-side equipment" coverage that Navigators provided in the first year. The Excess Marine insurance was renewed with London Underwriters at a 26% increase in premium with a mandatory War and Terrorism exclusion attached. All other terms and conditions are as expiring. Boiler and Machinery The Boiler and Machinery program was renewed with the current carrier, Zurich American Insurance Company with a 1.6% increase in premium due to increase in values. Coverage was renewed at expiring limits, deductibles, and terms and conditions. The campus/medical center continues to be responsible for the $100,000 deductible. As a reminder: co-generation facilities must report business interruption values in order for this coverage to be effected. If the values are not reported, there will be no business interruption coverage. Fine Arts The current Fine Arts carrier, American Zurich Insurance Company (London), continues to be the most favorable program for the University. This is the second year of a three-year policy. The premium, limits, deductibles, and terms and conditions remained the same. Any questions on the above may be directed to Deborah M. Luthi, Director, Risk Management Services, at 2-6537 or dmluthi@ucdavis.edu. Janet C. Hamilton Vice Chancellor-Administration 02-105
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