2013-12-11 CC Packet - Laserfiche WebLink

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Frequently Asked Questions about Your LMCIT Rates and Dividends Rather than return dividends, why doesn't the Trust just reduce premium rates up front? LMCIT's practice is to incorporate a solid contingency margin into the premium rates. That margin is meant to cover the extra cost in case losses turn out to be more than what we've projected. By doing so (and then returning the extra funds afterwards if it turns out that they're not needed), LMCIT is able to keep premium rates much more stable from year to year. In other words, it helps keep premium rate changes in the range of a few percent up or down each year, rather than the much larger year -to -year premium rate changes that would be seen if LMCIT set lower rates with a much smaller contingency margin. '> — - °" ? 'n• INVESTMENT REVENUE MARGIN D;VIDEND COMES r „„ j r� INCOME Premium +investment income FROM DIFFERENCE EXPENSES •' Y.F.nxi�l , Losses +reinsurance +adm inistration AUMINWRAIJON MARGIN Difference between ro ected revenue' °”` _ .• P 1 REINSURANCE and projected expenses DIVIDEND - ,y PREMIUMS Money returned to Trust Fund- 1iy -, members from the margin 1 , LOSSES ? 4 •# If losses are as projected, the margin becomes the income How is the dividend determined? The basic principle is that the funds LMCIT holds belong to member cities, and that any funds that LMCIT doesn't need should be returned to the members. The decision on whether and how much of a dividend may be possible is essentially an evaluation of whether the programs' fund balances are currently at appropriate levels. If the fund balances are more than the LMCIT Board concludes are needed, those excess funds are returned to members as a dividend. The fund balance is meant to provide funding for several kinds of risks: the risk that new losses turn out to be more than the premiums were designed to fund; the risk that old losses turn out to be more expensive than estimated; the risk that a reinsurer might default and not reimburse LMCIT for what they owe on a large claim; the risk involved in expanding coverage in new risk areas where LMCIT doesn't have good data to accurately quantify that risk; the risk of investment losses; and so on. Over the past few years, the LMCIT Board has devoted a lot of attention to the question of how much fund balance the LMCIT prog rams should maim - a d e v e lo pin g ec f^ + t n fn +h ,,• nr S r g nd sp„ 1 1., urge rang ..,r u.,, T , o programs fund balk based on what's needed to address those risks. In making the decisions on dividends, the LMCIT Board looks at how much if any net income the program has generated for the fiscal year and where the resulting fund balance is compared to the target ranges. Sometimes there are other considerations to take into account. This year, for example, one factor the LMCIT Board considered was the large number of liability claims that have been filed alleging violations of the privacy of driver's license data. Because there's no way to know or to reliably estimate what those claims might ultimately cost, the Board decided that for now it makes sense to hold on to additional funds as a hedge against that risk until LMCIT knows how those claims will play out. 61 Page