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Home My WebLink About09 - Renewal of Insurance Broker of RecordCITY OF NEWPORT BEACH CITY COUNCIL STAFF REPORT Agenda Item No. 9 October 24, 2006 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Human Resources, Lauren. Farley, Risk Manager, (949) 644 -3302, Ifarley@city.newport-beach.ca.us SUBJECT: Renewal of Insurance Broker of Record — Property/Casualty Insurance Issue: Should the City Council approve the renewal of contract with Brown & Brown and authorize the expenditure of $109,000 anually for broker services for property/casualty insurance? Recommendation: City Council approve the renewal of Brown & Brown, as the City's Broker of Record for property/casualty insurance with annual broker fees not to exceed $109,000 annually at a guaranteed rate for three years. Background: The city purchases a broad range of property and casualty insurance coverage to protect its assets through a licensed broker in the state of California. These are: All Risk Property ,(including Boiler and Machinery), Earthquake & Flood, Crime, Fiduciary, Watercraft, Excess Workers Compensation, Excess General Liability, Pollution Liability and Oil Well Bonds. All these insurance policies renew March Vt every year along with the Pollution Liability policy which is currently in the second year of a three year rate guarantee. The process of procuring the City's property and casualty insurance coverage begins with the Risk Management staff and the City's broker working diligently several months prior to the renewal date by conducting a thorough review of the City's operations, schedule of property assets (real and personal), policy and procedural review and any additional services or operational changes that might occur within the next policy period. Once this review is completed, the Broker begins researching the insurance markets and working with the respective underwriters to obtain the most comprehensive coverage at the best possible price. Three years ago during the broker selection process, Brown & Brown received unanimous approval from the selection committee, City Council Finance Committee and City Council as the brokerage firm that best met the City's needs for commercial insurance based on the following attributes: • Knowledge — extensive knowledge of city operations and risks (15 years for team leader) • Team Approach - to servicing the city in which several executive level persons participate • Detailed Plan - for addressing the city's risk management and insurance needs • Dedication - to service as exemplified by functions currently performed on behalf of the city that are not common services provided by brokers (review and follow up on evidence of insurance in compliance with contract requirements) • Willingness — to put the city's interests first by assisting the city in looking at all risk management alternatives including self- insurance pools (Joint Powers Authorities) which would be an alternative to the broker's services • Flexibility - Brown & Brown offers the most flexibility as it does not have any incentive to compel or influence the city to participate in broker - sponsored group programs that may not fit the city's needs • Pricing - for services on a guaranteed fee vs. a commission structure for 3 years, including services for which other brokers charge extra fees Three years ago, staff recommended and Council approved the fee based compensation structure versus the traditional commission structure (standard commission in the broker industry is ten percent of total earned premium). This fee based structure has worked well for the City with savings over $278,556 in broker fees over this three year period. Discussion: The Brown & Brown team led by Mark Zahoryin, Senior Vice President has exceeded staffs expectations as they consistently deliver a high level of service to the City. They provide value added services such as insurance contract and certificate of insurance review at no additional charge which is unmatched in the broker industry. This .service alone saves hundreds of hours of staff time annually and is especially valued by the Public Works, General Services, Utilities and Recreation departments. Also, within this three year period, the full financial impact of the terrorist attacks of 2001 and the hurricanes of 2005 were realized by the insurance industry especially in the areas of workers compensation and property /catastrophic (earthquake and flood) coverage for both the private and public sectors. During these market difficulties, Brown & Brown's continued dedication to the City's insurance needs ultimately lead to increased insurance protection with reductions in premiums in both these areas. When Council approved the Brown & Brown annual fee of $91,500 in October 2003 it included the following coverages of: All Risk Property (including Boiler and Machinery), Earthquake & Flood, Crime, Fiduciary, Watercraft, Excess Workers Compensation, Excess General Liability, Pollution Liability and Oil -Well Bonds based on a March 1" renewal date. At the time, all but two of these coverages (workers compensation and pollution liability) were on the strategic marketing renewal date of March Vt. Staff recommended extending the policy period for the workers compensation (WC) coverage by six (6) months which required additional premium of $230,617 at the expiring rate and additional broker commission of $14,599. The pollution liability (PL) policy was also extended by three (3) months which required additional premium of $24,326 at the expiring rate and additional broker commission of $2,379. The following chart reflects the broker compensation from October 2003 to September 2006 and the added builders risk insurance commission of $5,357 for Back Bay Science Center and Newport Coast Community Center: Additional Commission For Policy Extension & Annual Fee + Builder's Risk Insurance — Total Amt. 10103- 10104 $91,500 10104- 10105 $91,500 10105- 10106 $91,500 $14,599 for WC policy . $106,099 $2,379 for PL policy $93,879 $5,357 for Builder's Risk $96,857 Insurance $296,835 In this same period, if the previous commission fee structure (10% of total earned premium) was still in effect, the broker fees would have been $575,391 ($191,797 average per year) as compared with the contracted flat fee based structure of $296,835 ($98,945 average per year). This fee based structure saved the City $278,556 (57 %) in broker fees over the three year period. Also, over the past three years, there has been no increase in the annual fees paid to Brown & Brown. For this renewal contract, they are requesting a 10% increase over the average $98,945 per year to $109,000 per year from 10106 to 10109. Funding Availability: Funds which cover the recommended expenditure are in the Internal Services Budget — Insurance Reserve Fund, #6010 -8714 and #6020 -8714. Prepared by:,. Submitted, y: Lauren F. Far ey, Risk Manager Barbara Ramsey, HR Director