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Shared-Risk Insurance Pools for Transit Agencies: A Guide (2023)

Chapter: Chapter 3 - Phases to Create and Operate a Transit Pool

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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
×
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
×
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
×
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
×
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
×
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
×
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
×
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Suggested Citation:"Chapter 3 - Phases to Create and Operate a Transit Pool." National Research Council. 2023. Shared-Risk Insurance Pools for Transit Agencies: A Guide. Washington, DC: The National Academies Press. doi: 10.17226/27419.
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6 Deciding whether to create and operate a transit pool requires a phased and disciplined approach, with each phase building on the others. This chapter describes these phases and includes links and references to additional information as necessary. 3.1 Phase 1: Perform Exploratory Study Most transit pools start with a group of similar transit agencies (in size and exposure) that want to look for insurance coverage that is cheaper than commercial insurance or want to find insurance that otherwise is not available to them. The first step in determining whether a pool is an option is to carry out an exploratory study, which is a well-defined process with the following purposes: • To identify those organizations interested in establishing a pool. • To identify the coverage by type (e.g., vehicle liability, vehicle physical damage) to cover in the pool (a list of relevant coverage types is included in Appendix B). • To identify the premium currently being paid to commercial insurers or other pools for the intended coverage. • To determine whether those organizations share common goals and objectives, needed cover- age, interest, and demographics (as identified in Appendix C). 3.1.1 Executive Committee The first step is to select an executive committee, made up of two to three representatives from the transit agency members, to conduct the exploratory study. 3.1.2 Pool Exploration Leadership Establishing and operating a pool requires a high level of experience and expertise. Selecting a knowledgeable pool manager is critical. There are two options: select a person from the orga- nizations interested in establishing a pool/executive committee (internal) or contract with a professional pool management firm (external) to lead the study. Table 1 lists the advantages and disadvantages of internal and external pool management. Contracting with a professional pool management firm is recommended, as an external pool manager is a low-cost early step during this phase; a pool management firm may be willing to perform the exploratory study at no fee. Compensation for a pool management firm’s participation when establishing and operating the pool should be separately negotiated under a fee agreement between the firm and the pool. Consider using the scorecard provided in Appendix D to help evaluate pool management firms. Using a scorecard will avoid bias and focus the decision process on the needs and priorities of the pool. C H A P T E R 3 Phases to Create and Operate a Transit Pool

Management Type Advantages Disadvantages Internal Management (Transit Agency Staff) May save time on training and orientation because the internal applicant may have more knowledge of pool members' needs and services. May be faster to recruit staff internally than externally as it leverages the pool’s assets. May offer a better understanding of state transit operators’ political culture. May require time to acquire the knowledge and experience needed to manage the pool. May limit innovations and ideas as existing staff may be comfortable with the status quo and not seek change. May require the assumption of additional duties and responsibilities for existing staff. External Management (Pool Management Firm) Specific employees may offer talent, skills, experience, and influence that an internally managed pool may not. May be able, due to the scale of its platform, to gain immediate access to talent, knowledge, experience, information, and services otherwise unavailable to the pool. May be able to identify problems more quickly and avoid significant political or financial issues. Keep internal biases, emotions, and politics out of the decision- making process. Can cast a broader net to select/recruit the most suitable skill set. May have a limited understanding of member and state transit operators’ cultures and political environment. May discourage pool members from developing internal capabilities. (A good practice may be to transition from outside to inside management after the pool has proven its ability to sustain operations.) Table 1. Considerations when choosing pool exploration management.

8 Shared-Risk Insurance Pools for Transit Agencies: A Guide 3.1.3 Pool Management Fees Pool management fees will vary depending on the services provided and the number of pool members. Table 2 presents the maximum levels that can be expected. For consistency, this Guide suggests pool management and other fees be set as a percentage of total pool contributions. The pool management fee is part of the underwriting expense shown in Table 3. 3.1.4 Pool Benefits Marketing to potential pool members may be necessary to obtain sufficient interest and con- tributions to establish a pool. This marketing is part of the process of exploring, creating, and delivering value to meet the needs of potential pool members. The advantages of sharing losses may not be obvious to some organizations. Figure 4 displays the benefits of a shared-risk pool. The subsections that follow provide further explanation of some of these benefits. The shared-risk pool benefits arise from the following advantages: • Buying power is the result of consolidating the insurance purchasing through the pool. The pool is gaining additional buying leverage through scale and getting direct access to the reinsurance market, which can add significant capacity above what is available in the com- mercial market. • Flexibility results from the ability to provide increased deductibles and some rate relief that is not available from commercial insurance markets. When commercial insurers are reducing capacity, the pool assumes the risk, whether it be a middle or upper layer of a coverage tower or the entire exposure for a more difficult risk. A pool can also cover new risks or risks typically excluded in the commercial market. Without a pool’s added flexibility, an insured is bound to the terms of the commercial market, whether hard or soft. Responsibility Total Pool Contributions Maximum Fee Board Maximum rate: 4% $40,000 Sources: Interviews with existing transit pool operators and interviews with firms that provide pool management functions. Note: As a result of economies of scale, pool management fees expressed as a percentage of gross contributions will substantially decrease as the pool’s total contributions increase. Table 2. Expected pool management cost. Expenses Commercial Cost (Expense) Pool Costs (Expense) Potential Pool Savings Commissions Underwriting General & Contingency Taxes & Fees Marketing Losses Total Expense Net Profit/Retained Surplus Rating Load Factor 12.4% 40.0% 8.2% 2.6% 7.0% 37.1% 97.5% 2.5% 60.0% 0% 28.0% 5.0% 1.0% 2.0% 37.0% 73.0% 27.0% 28.0% 12.4% 10.2% 3.2% 1.6% 5.0% 0.1% 24.4% 0% 32.0% Source: ACORD 2020. Table 3. Potential economic benefits from pools.

Phases to Create and Operate a Transit Pool 9   • Transparency results from each member being part of the pool’s operations: rating, loss control, and claims management. • Choice is the result of a pool’s ability to choose its self-insured retentions, coverage limits, and types. It also includes how the pool chooses members. • Control is a result of the pool operating for its own needs rather than for the needs of com- mercial insurance markets and also contributes to having more stable insurance costs and coverage. • Having one point of contact results in a convenient way to coordinate and align information and requests. It brings order and assigns correct priorities to requests and tasks as they come. Some of the commonly expressed concerns about risk pools and some challenges are dis- cussed in Appendices E and F. Cost Savings The financial benefits of pools enhance the taxpayer value of this form of insurance. Pools offer other cost-saving benefits because of the following: • Pool reserves can be returned to members as reduced rates or dividends. • Pools understand local government risks and can work together to minimize risks that would increase costs to taxpayers. • Pools offer long-term risk management as their goal, which helps members stabilize long-term costs, reduce risks, and increase safety. As an example, the Utah Counties Indemnity Pool (UCIP), which began operations in 1992, has achieved the following insurance rate reductions by pooling risk among its members (Utah Counties Indemnity Pool 2022): • Overall rates have decreased by 52.2% since 1998 • Property rate has decreased by 76.7% • Liability rate has decreased by 18.5% Additional savings in the decision to establish a pool include the following: • Risk pooling can save between 5% and 45% of the total cost of risk (National League of Cities 2014). – The National League of Cities (NLC) Risk Information Sharing Consortium has found that “The pooling sector’s long-term performance on reducing risk . . . is substantially better Figure 4. Benefits of shared risk pools.

10 Shared-Risk Insurance Pools for Transit Agencies: A Guide than the commercial insurance sector’s record serving public entities” (National League of Cities 2014). • Risk pooling can reduce the cost of insurance over time. – For example, the NLC Risk Information Sharing Consortium indicates that “ . . . individual Pool members have reduced their cost of insurance, over the long run, by an average of 10–20 percent annually compared to buying commercial insurance” (National League of Cities 2014). – For the Intergovernmental Risk Management Agency (IRMA), which is a member-owned, self-governed public risk pool, “administrative costs are less than 11% versus an estimated 20%–25% for commercial insurance Providers” (Intergovernmental Risk Management Agency n.d.). • Enhanced awareness of and responsibility for loss prevention, the prompt correction of unacceptable hazardous conditions, and innovation and technology can all increase savings for the pool. • Because a public organization’s risk-sharing pool can focus its efforts on a single exposure to the risk of loss, it will produce savings on the high side. Cost Reduction Shared-risk pools, unlike commercial insurers, provide coverage specific to public-sector activities on a consistent and economical basis. The pool must provide the same services, such as collecting contributions (premiums), managing reserves, mitigating risk, and adjusting loss, that a commercial insurer provides. However, pools may be able to execute these services more cost-effectively than commercial insurers because they • Reduce underwriting expenses. Pools have lower fees and no commissions, less administra- tion overhead, and streamlined underwriting. • Reduce additional insurance costs, removing the need to purchase primary coverage. Mem- bers only purchase reinsurance, excess, or stop-loss cover on an as-needed basis. • Reduce administrative expenses and profit expenses. Administrative costs will be signifi- cantly less than for a commercial insurer, in part due to uniform policies and procedures across each member. • Reduce operating costs. Operating costs will be significantly less than for a commercial insurer, as the pool is not seeking a profit. • Accelerate cash flow. The pool retains contributions until the claims are paid out and controls those funds on behalf of the members of the pool. A commercial insurer also retains the pre- miums but has complete control and ownership of those premiums, including any interest earned. These premiums provide a relatively predictable cash flow and investment income stream for the pool when the loss is paid over time. • Benefit from the excess earnings on investments of reserves. • Design coverage and provisions tailored to the needs of pool members. • Provide coverage not economically available in the commercial insurance market. Risk Mitigation Practices and Procedures Unlike the generic approach of commercial insurers, pools provide transit-specific risk miti- gation, such as the following: • Improving data management and claims cost management. • Improving management reporting and understanding of risks. • Standardizing policies and procedures. • Operating and managing risk mitigation measures and training that are more targeted to the transit organizations’ operating practices. • Implementing appropriate stop-loss or excess reinsurance to manage peak risk.

Phases to Create and Operate a Transit Pool 11   Flexibility and Coverage Structure The pool’s initial coverage structure can transfer excess losses to commercial insurers. Then, as the pool’s inherent advantages mature, it can assume more of its risk of loss, reducing its costs and dependence on commercial insurance. Unlike a commercial insurer, a pool does not need to fund its expected loss fully. Casualty loss, a loss primarily caused by injuries to persons and legal liability imposed for bodily injury or damage to property of others, is the type of risk best suited for coverage in a pool. Casualty losses have a longer loss payment pattern, meaning they are paid out in small amounts over time. This is referred to as a slow loss payout profile. Automobile (including bus) Liability (AL) is an example of a risk that may be paid out over a number of years. Due to the amount of time it takes to file a claim and go through the litigation process, it may be years before the payout period for the claim begins. This can be beneficial for new pools getting started, as it gives them a few years to build their cash reserves before deal- ing with large claim payouts. Additionally, the pool reserves can be invested or held as surplus depending on state investment policy. The accumulation of a surplus in the pool increases its owners’ (members’) capital, enabling the ability to retain risk of loss or lower their total costs of risk of loss. The result of this situation is a relatively predictable cash flow and investment income stream from invested pool reserves when the loss is paid over time. Losses that do not pay out all at once, such as those described, counterbalance the pool’s startup risks and allow it time to build capital and loss reserves. This lowers the pool’s volatility risk. The longer the pool exists, the lower the volatility because it has higher loss reserves and investment income. Placing property insurance in the pool is not recommended due to its inherent lack of predict- ability. If considering this coverage, the pool must be willing to assume a significant amount of risk and volatility in the early years of coverage. Property coverage is best obtained for pool mem- bers by purchasing a group property insurance policy from commercial insurers or, if allowed in your state, by creating a separate legal entity known as a risk purchasing group (RPG). Obtaining group property insurance coverage from commercial insurers or through an RPG benefits pool members because it allows them to get the insurance at a lower premium, with broader coverage terms, and provides the pool with greater control of losses and risk management programs inde- pendent of the source of coverage. When obtaining group insurance, carefully consider coverage forms. The policy may be subject to a group aggregate limit. An aggregate form of coverage could be exhausted before coverage renewal, leaving no coverage for other pool members. 3.1.5 Pool Characteristics The minimum contribution per line of coverage (e.g., automobile liability, automobile physi- cal damage) and the minimum number of members that a public-sector shared-risk pool should have before commencing operations will vary depending on the circumstances of the transit agency members. Neither the premium nor the number of members will determine whether to establish a pool. Two or more members can form a pool with sufficient economic power (ability- based financial capabilities and characteristics) to cover the projected loss with sustainable SIR at an acceptable confidence level. A larger number of members requires a lower contribution by each member and makes a pool easier to finance. A decision on the amount of premiums and number of members should consider the following factors: • Whether your state requires a minimum reserve capital to establish a pool. • The existence of state sovereign immunity, “capped” tort liability. • The number of interested members. • A strategy for navigating the early years.

12 Shared-Risk Insurance Pools for Transit Agencies: A Guide A pool’s early years are the most hazardous. The research team recommends focusing on cov- erage and losses that do not pay out all at once to counterbalance the startup risks and allow the pool time to build capital and loss reserves. 3.1.6 Characteristics Required to Proceed Based on the exploratory study, suppose a group of transit agencies is interested in creating and operating a pool. Further, given the inherent predictable nature of casualty losses, as described in Appendix B, the coverage the agencies seek is suitable for a pool and the potential members share common exposures to risk of loss and alignment with the Fundamental Factors that Contribute to Shared-Risk Pool Success (see Appendix C). With the assistance of pool management, the organization can confidently initiate Phase 2. However, if these conditions do not exist, further exploration should be conducted before a pool is established. 3.2 Phase 2: Conduct Feasibility Study A feasibility study should be conducted with the help of an independent professional actuary. The feasibility study aims to evaluate whether the group of organizations interested in establish- ing a pool has sufficient economic power (ability-based financial capabilities and characteristics) to provide the desired coverage with a sustainable SIR, lower the long-term total cost of risk, and create conditions that lead to better operational procedures and a safer working environment for employees and users. The feasibility study examines the group’s combined loss data and potential rate of return on investments covering 5 to 10 years through financial modeling. It determines the expected loss (loss pick), establishes a confidence level associated with it, and identifies sustainable SIR levels and the level at which excess or reinsurance limits would begin to apply (known as the attach- ment point). The essential results of the feasibility study are as follows: • A forecast of the total gross member contributions needed by year with associated member self-insured retentions. • The satirical confidence levels in the forecast. • The minimum capital contribution required by state law. • Any other actuarial opinions. Table 4 shows the responsibility, estimated cost, and time requirements to implement a feasi- bility study and subsequent annual reviews. Responsibility Estimated Cost Timeline Organization and Pool Manager $5,000 to $30,000. This fee will be included in the pool management fee if the pool manager also provides the feasibility study. Factors that determine the costs are as follows: • The number of members to be included in the study • The lines of coverage being considered for inclusion in the pool • The quality and availability of loss data • The process for reviewing the study, providing feedback, and selecting the preferred course of action • The use of internal or external pool management 14 to 60 days Pool Management and Board Subsequent annual reviews are $5,000 to $15,000. These costs will be affected by the same factors affecting the first actuarial study. 30 days Source: Interviews with leading commercial firms providing professional pool management services. Table 4. Estimated cost: feasibility study for urban and rural pools.

Phases to Create and Operate a Transit Pool 13   3.2.1 Data and Information Needs Actuaries must be provided with your state’s sovereign immunity/tort liability statutes limiting liability (if any). Additionally, actuaries will need the following information to conduct the feasibility study: • A completed and updated insurance pool application from each potential member for desired coverage (e.g., automobile liability, automobile physical damage). • A summary of current applicable insurance coverage. • Copies of existing insurance policies, including any endorsements or exclu- sions concerning desired coverage. • Payroll and revenue concerning operations and activities (including con- tracted activities). • A 10-year loss report that includes a list of reported claims, such as the date of occurrence, type of claim, the amount paid to date for each claim, and the amount held in reserves for each claim. The report should also include whether there have been any changes to coverage and exposures (e.g., changes in the scale or types of transit service offered) in the past 5 to 10 years. If so, incurred losses may not indicate future occur- rences. Unless supplementary data are available showing exposures excluded from coverage, the insurer’s loss run will not give an accurate picture of expected losses. Also useful is a description of the organization showing owned operations and services and contractor opera- tions, services, and costs. • Copies of risk management programs, loss mitigation or prevention programs (such as driver training and driver selection criteria), and state restrictions on pool investments should also be included. The financial modeling will evaluate the advantages and disadvantages of different amounts and types of risk retention. It will identify how costs and benefits vary depending on the scope of the pool membership. The analysis will also evaluate different capital or collateral requirements needed to optimize the pool’s performance and membership size to minimize the pool’s total cost of risk within the pool’s ability to retain risk. 3.2.2 Forecasting Expected Loss The feasibility study will produce an expected loss using one of two methods: probability analysis (confidence levels) and linear regression. Confidence level refers to the mathematical probability that a future loss will exceed the feasibility study’s expected loss. The forecasting discussed in this Guide is based on confidence levels. Confidence levels dem- onstrate how actual losses vary from the projected losses, enabling decision-makers to assess the risk involved with their loss projection. The confidence level applied to the financial modeling in a pool’s feasibility study is a critical decision-making tool. The confidence level is expressed as a percentage (see Figure 5). For example, assume that an actuarial analysis indicates $1,000,000 is the expected pool loss (loss pick). A 90% confidence level suggests that loss will probably not exceed $1,000,000 in 9 of the next 10 years and will probably exceed $1,000,000 in 1 of the next 10 years. Similarly, a 95% confidence level indicates that there is only a 5% chance that losses will exceed the loss pick for the year. With appropriate interpretation, confidence levels are an essential part of complete actuarial analysis to help organizations see the “big picture” of the potential for loss. This big picture will help the pool make decisions about self-insured limits and the attachment points for excess and stop-loss commercial insurance coverage obtained by the pool. According to the National Conference of State Legislatures (2010), “At least 33 states’ acts limit, or ‘cap,’ the monetary amount for damages that may be recovered from judgments against the state. At least 29 states (often in combination with a cap) prohibit a judgment against the state from including punitive or exemplary damages.”

14 Shared-Risk Insurance Pools for Transit Agencies: A Guide State funding and capitalization requirements (minimum reserve funds) are less stringent for municipal pools, if required at all, than those for private pools. Municipal pools do not pay taxes, so they can cover more risk with the same amount of contributions than private pools can. Although municipal pools can generally safely fund at a lower confidence level than private pools, this Guide recommends all pools fund at a confidence level of at least 80% or higher. The more predictable a loss, the more the pool should assume the loss and not pay to transfer it to a commercial insurer. Understanding this need for a pool to fund to a known confidence level reinforces the recom- mendation that professional actuaries are essential for the feasibility study. Professional actu- aries or other risk management professionals should be consulted before deciding on a funding level for the pool. Establishing a shared-risk pool without professional actuarial service is not recommended. Unless a pool develops and maintains accurate actuarial-based proprietary data specific to and controlled by the pool, it will be unable to optimize its risk appetite and refine its risk portfolio. Precise data analysis enhances the pool’s inherent advantages, unlocks insights into members’ needs, and helps steer the coverage and investment decisions to improve the pool’s performance. However, financial modeling is heavily dependent on the state of the economy. Any unexpected shift in the number of members, funding, loss rates, loss inflation, or rates of return on reserves due to economic downturns can significantly affect the accuracy of such projections. 3.3 Phase 3: Make Decision If the feasibility study shows that the organizations interested in establishing a pool have suf- ficient economic power to establish and operate a pool, the organizations can then proceed to establish a pool with confidence. If adequately managed, this pool will provide funding to cover loss at an acceptable SIR level and will be self-sustaining. If doubts remain, a gap analysis can clarify the decision. A gap analysis is a decision-making process that compares an organization’s desired results with existing outcomes (see Figure 6). Figure 5. A 90% confidence level and a 5% confidence interval on each side of the mean “0” on a normal curve. Identify Desired Outcomes Understand the Environment Identify Existing IdentifyGaps Identify Opportunities to Bridge Gaps Opportunities DecisionPrioritize Outcomes Figure 6. Gap analysis illustration.

Phases to Create and Operate a Transit Pool 15   The advantage of a gap analysis is that it looks beyond the financial measures, which is essential because pools provide more benefits to their members than financial alone. There are fundamental concerns beyond economic issues that should be considered when deciding whether to establish a pool. “Pooling is prevalent among smaller and mid-size public entities because they derive especially powerful benefits from sharing risk through a pool” (National League of Cities 2014). Gap analysis picks up on these additional benefits to small- and mid- size agencies that financial analysis otherwise would not. Over time, pool membership typically evolves from a relatively small group to a much larger group, resulting in increased contributions to the pool as it obtains its defined goals and objectives. If, after a gap analysis, the executive committee (Section 3.1.1) and transit agencies are confi- dent that establishing a shared-risk pool is the best means of achieving their risk management goals and objectives, they should create a pool mission statement (Phase 4) and follow the sub- sequent phases outlined in this Guide. 3.4 Phase 4: Create Pool Mission Statement Upon completing Phases 1 through 3, the transit agencies, led by their executive committee, should have sufficient knowledge and insight to create a pool mission statement. A mission statement summarizes the objectives and values of the pool. Pools exist in a dynamic environment. Thus, a pool’s mission statement should be “living,” adapting as priorities change over time. Answering the following questions will help to establish what should be covered in the mission statement: • What benefits will the pool seek to provide? – Stable rate? – Customized coverage? – Value-added services? • What organizations does the pool intend to service? • What are the target service and risk profiles of the organizations? • How will the benefits be provided? – Access to affordable coverage? – Implementation of effective loss control processes? – Participation in the claims management process? – Accumulation of risk-bearing capital in a financially efficient manner? 3.5 Phase 5: Establish Shared-Risk Pool Pools must be established in a status or condition necessary for the accurate execution of their intended purpose that is both acceptable to its owners and in compliance with applicable state statutes. This will include the creation of the pool as a legal entity, a board, bylaws, and members. 3.5.1 Develop Pool Rules and Regulations Pool organizational documents may include state certificates of authority, member agree- ments, coverage documents, joint powers agreements, intergovernmental trust agreements, bylaws, board policies, and procedures. The pool organizational documents should address the appointing of pool management, which should have powers granted to it in the bylaws for run- ning the pool on behalf of the board. These documents become part of the pool’s operation plan (see Section 3.6) filed and approved by state regulators. State approval is required for multiple Example Mission Statement “The California Transit Indemnity Pool is a member-driven public sector organization dedicated to providing stable, cost-effective insurance, risk management, and safety services to public transit agencies.” CalTIP (California Transit Indemnity Pool) https://www.caltiponline.org/

16 Shared-Risk Insurance Pools for Transit Agencies: A Guide steps in Phase 5. Each pool will need to review the state requirements and schedule its Phase 5 steps to match the requirements for state approval. Pool Membership Initial membership will likely consist of those organizations that participated in the explor- atory and feasibility studies. New members may apply to the board for membership. The qualifica- tions for new members should be addressed in the pool bylaws. The process should include the cost of analyzing the potential member’s application. A loss history of 3 to 5 years or more should be included in an organization’s application to be statistically relevant. The applicant’s expected loss (loss pick) should be calculated to the same confidence level used by the pool to project its losses. The loss history should include all open claims and reserves held against those claims. The applicant’s risk profile must be examined to determine how well it mirrors the shared exposure to risk of loss for the pool (see Appendix D) and other information the board deems appropriate. For example, does the applicant qualify under the state’s limitation of liability statute (if appli- cable)? The board should have the final authority on all applications. Private Sector Operations Private sector operations typically occur when a public entity responsible for public transportation contracts the delivery of all or some of the public transportation service. Major variations on this practice are when the agency contracts only the operation and only the maintenance of the vehicles using separate contracts, or only contracts for one of these functions. Another variation is when vehicles (and facilities) are supplied by the private contractor and transferred to each new contract operator for operation and maintenance. Private operations, particularly private non-profit corporations, may operate as public transportation providers and may receive FTA Section 5310 or other public funding assistance. In all these cases, the operators are private sector employees, and there is typically exposure of both the vehicle operator and the overriding liability of his/her employer as well as some exposure of the sponsoring public agency. In such cases, coverage needs to be coordinated: if the pool will allocate cost to the public agency member based on passengers, miles, vehicles, or any agreed-upon formula, the public agency should not also pay a private contractor to purchase insurance to cover the same exposure. Generally, the pool should make it clear that it covers the private operations, including the privately employed operator, and the terms of the public transportation service contract should be clear on precisely what coverage is provided by the pool. When a state law limits the amount that can be recovered by claimants from public agencies (sovereign immunity), another consideration is created. Privately employed vehicle operators and their employers will typically not be protected by the sovereign immunity law in the way that publicly employed operators and their public agency employers are protected. Therefore, the public transportation services delivered under contract with private companies have a greater exposure to loss than those that are directly operated by public employees. Some insurance pools such as the Ohio Transit Risk Pool exclude privately operated service from their coverage. Others may decide on a different allocation formula for privately operated service or an entirely separate pool for privately operated service. As each candidate for membership in the pool is considered, the pool must confirm that they qualify for membership in the pool in compliance with any state law restrictions on the pool and the organizing documents. The pool should confirm that the candidate does not deliver public transportation service in a way that invalidates the coverage or precepts of the pool. Contracting with private companies for service operation is common throughout the public transportation industry, so the pool should ensure that the terms of coverage regarding private operations are understood by the members in case they currently contract or consider contracting out in the future.

Phases to Create and Operate a Transit Pool 17   Capital Contributions State regulators do not typically require a minimum level of capital contributions from municipal pools to be granted a certificate of authority or a license to operate. However, pool members may be required to contribute capital before the pool issues its policies. State statutes and the organizational documents determine whether a minimum capital amount is needed. If needed, capital may be in cash, or other forms, as determined by the board. The organizational documents should require financial assessments to maintain pool liquidity and financial viability (once during setup of the pool and later once per coverage period). Election/Appointment of Board Pools are managed by a board of trustees or board of directors; the Guide refers to both as the “board.” The organizational documents shall specify how nominations for board members will be accepted. For example, board members could be board-appointed, recommended by a nominating com- mittee, recommended to the membership, or nominated from the floor. The organizational documents will also establish board members’ terms of service, qualifications required, and the process for removal of board mem- bers. Removal of a board member should be automatic if an individual fails to qualify unless the pool’s bylaws allow an individual to complete their term first. Removal of board members for any cause should be addressed in the governing documents (i.e., members may include a provision that removal of board members requires a supermajority vote of the board or pool members). A pool’s board should be diverse, with members of different backgrounds and varying areas of expertise representing both large and small members. Governing documents should include a “hold harmless” clause. The pool should be willing to indemnify board members, pool manage- ment, and service team providers if they are held liable when operating with the knowledge and approval of the board. Board Meeting Notice and Quorum The organizational documents need to specify where and when meetings are to be held, requirements for notice and waiver of notice of regular and special meetings of the board and members, as well as quorum requirements. Quorum requirements should be addressed and at a minimum must comply with state requirements. State law may also require public notice and public participation (often depending on the number of board members meeting), or contain other sunshine provisions. Board Procedures A state’s corporate law will establish whether a board can meet by phone or virtually. The state’s law or regulations will also govern whether the requirement for an annual board meeting can be satisfied by having at least one director physically present in the forum and others participate by phone or virtually. The pool may give voting rights based on the capital contribution rather than rely on in-person attendance. This must be stated in the governing documents. Members should have the right to inspect corporate records. Termination of Membership Should a member cease to meet the pool’s established eligibility criteria, the organizational documents must specify the procedure to terminate membership and affect the return of interests, the release of accumulated excess funds, or other repayments. The documents must address two See Section 3.8 for more information on establishing and operating the board.

18 Shared-Risk Insurance Pools for Transit Agencies: A Guide options: voluntary termination when the member decides not to renew coverage and involuntary termination when the member’s risks no longer comply with the pool’s underwriting specifica- tions. The organizational documents will need to specify whether paid-in capital or surplus con- tributions are to be returned and, if so, under what circumstances based on whether termination is involuntary or voluntary. Similarly, the documents will specify the process to be followed for liquidation of the pool. 3.5.2 Establish the Pool as a Separate Legal Entity Establishing a pool as a legal entity requires a name and an application to the state authority to lawfully establish and operate a pool. The pool should not accept contributions for coverage until the pool has received state authority to do so. In some states, this process can take several months. Examples (not state-specific) of the type of information and documentation that may be required to obtain state authorization include the following: • Pool’s name • Address of the pool’s principal office • Date of organization • Name and address of each pool member • Address where books and records of the pool will be maintained • Filing fee • Types of coverage to be offered to members of the pool • A copy of the pool’s articles of incorporation, articles of association, or bylaws • Proforma financial statements and projections for at least the first 5 years of projected opera- tions (available from the feasibility study) • The proposed members’ historical and expected loss experience, if reasonably available (avail- able from the feasibility study) • Appropriate actuarial opinions by a qualified, independent actuary, including the minimum contribution required to commence operations (available from the feasibility study) • A copy of any agreement entered into with a pool management firm, if appropriate • Disclosure of planned excess insurance, stop-loss, reinsurance arrangements, or sovereign immunity, and a copy of such agreements as they become available • Disclosure of member contribution levels and the underwriting criteria used to determine the contribution levels • Copies of coverage documents, member agreements, and certificates of coverage (COCs) forms to be issued by the pool • Copies of the pool operations plan, when available • Names of board members • Disclosure of the extent to which initial pool funding will be raised through the issuance of bonds • Annual reports, when available 3.6 Phase 6: Create Operations Plan A pool operations plan is the foundation for effective decision-making. It can be difficult to draft a comprehensive plan at the beginning stages of a pool, as there are still many unknowns about the future and how the pool will change as it grows. Because of this, a good operations plan will be dynamic and evolve as circumstances and conditions change.

Phases to Create and Operate a Transit Pool 19   3.6.1 Scope of the Operations Plan An operations plan should be prepared within 30 to 60 days of the creation of the pool. The operations plan will increase the efficiency of operations, facilitate proper coordination, reduce the risk of loss, aid in organization, give direction to all concerned, keep reasonable control of pool activities, encourage creativity and innovation, and motivate actions in support of the pool’s goals and objectives. Each of the following elements of pool operations should be identified in the operations plan: • Pool members • Exposure to the risk of loss • Pool coverage • Location of the pool (rural, urban, metropolitan, combination) • Effective date of pool coverage • Means of achieving pool goals and objectives 3.6.2 Underwriting and Loss Exposure A comprehensive underwriting process is essential to accomplish the pool’s objectives. The operations plan should include details of the pool’s underwriting process. Underwriting involves deciding which exposures to risks of loss the pool will provide coverage for and the limits it will provide. The initial contributions for the pool will be based on the expected loss (or loss pick) determined during the feasibility study, known as the pure contributions. Although pool rates will be consistent, no two members will pay the same total contribution, because each will have a different exposure to the risk of loss (loss exposure). The greater the number of pool participants, the more predictable the losses being paid by the pool become. The contributions paid to the pool will more closely correspond with the actual loss cost of the individual pool member over time. Underwriting is based on mathematics but depends on the needs and conditions under which the pool operates. Working closely with actuaries is necessary as the pool matures; the under- writing practice may need to adapt to a changing operating environment. For example, the pool may need to • Use a different exposure than used when the pool was first established. • Alter its SIR to better balance contributions and risk. • Offer various SIR plans to allow pool members to share some risk and save contribution dollars. • Apply discounts for risk management activities, size or volume discounts, and multiline coverage. • Apply rating discounts to offset pool investment income. A rating discount is a lowering of the rate due to the pool having better than expected underwriting (cash flow) results. It returns the excess to the pool owners in the form of discounted contributions. Rating Rating is a portion of the underwriting process that assigns a price based on what the pool believes it will cost to assume the financial responsibility for the members’ potential claims. The rating determines the amount of contributions the pool requires to meet its obligations. Rating combines a loading factor for pool expenses with expected loss (loss pick) to determine the written contribution. The loading factor consists of general and contingency expenses, fees, and marketing expenses. Unlike the commercial underwriting process, no additional fee is added to the contri- bution for profit or taxes.

20 Shared-Risk Insurance Pools for Transit Agencies: A Guide Document Underwriting Policy Documentation should include the coverage the pool will provide (see coverage matrix in Appendix B) and the coverage basis: rate class (bus, minivan, automobile, paratransit, highly flex- ible on-demand transportation, etc.), geography (metropolitan, urban, or rural), size (exposure or financial size), and loss history. This coverage basis needs to achieve reasonable homogeneity among members to achieve common objectives and level of shared risk as well as to avoid losing pool membership. The underwriting process for the pool will include the formula, coverage timelines, renewal date, authority over decisions, and frequency of actuarial reviews. The coverage documents should be included as well. See the glossary for a definition of coverage documents and Appendix A for links to sample coverage documents. Coverage documents that rely on contract law are recommended instead of standard insurance forms. Where required by law, pools use standard insurance forms created by the Insurance Services Office (ISO) or the American Association of Insurance Services (AAIS), which rely on insurance law. The pool participation requirements should be part of the underwriting policy and include training, professional design and engineering; safety; vehicle fleet loss mitigation compliance; and loss reduction practices and procedures. Members must fall within the state sovereign immunity-capped liability laws (if applicable). How the pool management will coordinate and document the underwriting process with the board and the service team should also be addressed as well as how the pool will issue COCs. More information on vehicle fleet loss mitiga- tion is available in Appendix G. 3.6.3 Reinsurance The pool should consider whether to procure additional commercial insurance (excess or stop-loss) to cover loss above the pool’s expected loss (loss pick) and, if so, on what basis (shared or not and aggregate or specific). Specific and aggregate agreements are described in more detail as follows. Specific. During a coverage period, the pool covers each claim up to a calculated attachment point, and then reinsurers cover each individual claim above the pool’s attachment point. The pool’s maximum exposure to loss, or the total possible loss it could experience is unknown. Rating Example Exposure units: 3,000,000 vehicle miles for the most recent year Expected loss: $0.17 per mile Pool loading factor: 28% (of $0.17/mile, calculating to $0.05/mile) Pool rating = Expected loss + pool loading factor = $ 0.17/mile + $0.05/mile = $ 0.22 per mile Contribution = Exposure units × pool rating = 3,000,000 miles × $ 0.22 per mile = $ 660,000 As the pool matures and obtains income from investing surplus funds, the loading factor may be discounted to the degree the pool and its actuaries judge prudent.

Phases to Create and Operate a Transit Pool 21   Aggregate. During a coverage period, the reinsurer pays out the total sum of all claims above the pool’s aggregate attachment point. The pool’s maximum exposure to loss is guaranteed to be the attachment point. For example, consider a pool that experiences three claims that total $2.6 million over a year. Claim 1 is worth $1.1 million, Claim 2 is worth $700,000, and Claim 3 is worth $800,000. In the specific agreement, the pool’s attachment point is $900,000. In the aggregate agreement, the pool’s reinsurance attachment point is $1 million for the year. This means that reinsurance pays out only $200,000 in the specific agreement, but it pays out $1.6 million in the aggregate agreement. This is shown visually in Figure 7. In this case, with this expected loss, it is most beneficial to the pool to have reinsurance on an aggregate basis, as the claims were of relatively similar value, and of small amounts. If a pool is expected to have a small number of high-value claims, it may be more beneficial to have reinsur- ance on a specific basis. 3.6.4 Risk Management Uncertainty surrounding the outcome of an event or action constitutes a risk. The risk itself is composed of four elements: exposures, hazards, loss, and perils (see Figure 8). When the result of risk can be financially quantified and has an adverse impact on some person or organization, it’s called a loss. Exposure is the state of being subject to loss (of assets, people, activity) because of some hazard, situation, practice, or condition. Exposure is also used to measure the rating units or the premium base for risk. A peril is an event, natural or otherwise, that will cause a loss. Perils originate in actions committed by the member, employees, or agents of the member. A liability risk does not arise from “perils” outside or beyond the member’s con- trol. Instead, it is concerned with causes of loss, which unintentionally damages or destroys real, personal, or intellectual property. Hazards are those factors that make a loss more likely to occur or loss settlements higher than expected. The hazard may be moral or physical. The operations plan must address the main aspects of risk management: identification; analysis and measurement; risk control; financing implementation; and monitoring (see Figure 9). Figure 7. Specific versus aggregate basis example.

22 Shared-Risk Insurance Pools for Transit Agencies: A Guide Identication is the process of identifying and examining the potential sources of loss faced by the pool. Analysis and measurement are the assessment of the potential impact of various expo- sures on the pool (qualitative and quantitative). Risk control is the assessment of the potential impact of various activities and practices on the pool (qualitative and quantitative). Financing implementation is the assessment of the potential impact of various activities and practices on the pool (qualitative and quantitative). Monitoring is the processing of implementing and moni- toring the risk management process as a whole. 3.6.5 Claims Manual An essential part of an operations plan is the creation of a claims manual that can be used as a risk management tool by the pool members. e claims manual documents the member’s responsibilities and control over the handling of a potential claim incident. A sample claims manual table of contents could include the following: • What is a potential claim incident? • How do I document an incident? • How do I investigate an incident? • What is a claim? • When and how do I report a claim? • Approval of legal representation. • Claims record retention. MonitoringFinancing Implementation Risk Control Analysis and MeasurementIdentification Figure 9. Elements of risk management. Figure 8. Risk components.

Phases to Create and Operate a Transit Pool 23   3.7 Phase 7: Establish Pool Operations Pools must be established in a status or condition necessary for accurate execution of their intended purpose as established in the pool’s purpose and operations plan. 3.7.1 Select a Target Date to Commence Operations This date will not coincide with all members’ commercial coverage termination dates. In almost all cases, members will receive a prorated refund of unearned premium on cancellation of com- mercial coverage. 3.7.2 Create Coverage Documents and Sign Membership Agreements Create coverage documents to include the following provisions: declarations, coverage agree- ments, exclusions, conditions, and endorsements (links to sample coverage documents are pro- vided in Appendix A). Create, negotiate, and have all membership agreements signed by those authorized to represent potential pool members (links to sample membership agreements are provided in Appendix A). 3.7.3 Select Service Providers The selection of pool management generally builds on the selection of the pool exploration management discussed in Section 3.1.2 and Table 1. In addition to engaging overall pool management acting to execute the board’s policies, transit insurance pools generally decide to contract with one or more firms to provide specific pool services. Pool services may include claims management, reinsurance brokerage, auditing, legal advice, actuarial advice, and consulting. The specific services provided should be designed to fit the particular needs of the pool. Some pool management firms will include these services within their scopes. Selecting service providers and establishing policies and procedures to enable them to perform their functions effectively are essential to the financial and operational success of the pool. The pool service providers will be directly involved in most pool activities and functions. Activities that can be performed by service providers are described as follows. Loss-Adjusting Services Loss-adjusting services are typically obtained from the pool service provider. When contract- ing for these services, the board needs to understand the different ways they can be purchased. Some service providers sell “cradle to grave” loss-adjusting services meaning that the service is 100% prepaid in the year the loss is incurred. Pools are more likely to want a loss-adjusting contract that allows services to be transferred, so they will agree to pay fees on an annual basis. There are also different ways that annual claims services define loss-adjusting services, which may include determining the extent of insurance coverage and compensability on each filed claim; the amount of damage or loss covered by the pool; recommending payment based on that coverage; negotiating payment; and settlement (or litigation). Claims Management Services Claims management is one of the most visible actions of a service provider. There are two standard options for securing claims management services: (1) fees are agreed upon a per- claim basis, or (2) fees are paid as a percentage of the premium. In either case, adjusters will be A tool to assist in selecting a pool service provider is included in Appendix D.

24 Shared-Risk Insurance Pools for Transit Agencies: A Guide reimbursed for expenses directly attributable to specific claims to allow the pool to seek recovery from reinsurers under reinsurance agreements that include coverage for allocated loss adjustment expenses (ALAE). Management services provide adjusters to perform a realistic, individualized analysis of each claim to determine the proper reserve. An adjuster will ensure that the appropriate treatment or service for the appropriate injury or incident is applied to that claim to reduce wasteful spending through unnecessary treatment or services. The management service should provide the pool with the following services: • Initial Contact. A 24-hour point of contact is necessary to gain all the valuable facts of the injury or incident before time disallows for an accurate assessment, relevant witnesses, and employee recollection. • Investigation. Each new claim is promptly and thoroughly investigated for facts and fraud indicators. Claim adjusters conduct investigations and advise the pool of the results, offering an opinion on risk exposure and recommended action (i.e., litigation). • Documentation. Documentation procedures facilitate the production of investigative reports, activity reports, and status reports. Statistical data are then recorded electronically in a format used to support defense, litigation, subrogation, and claims payment, keeping the pool apprised of each claim’s status. • Diary. A claim adjuster follows up on their initial action plan and prepares an updated and revised action plan outlining steps for claims resolution. A diary also ensures that state- mandated procedures and notices, statutes, and excess reporting deadlines are appropri- ately met. • Litigation Management. All litigation files will contain letters of assignment that detail the results of the investigation and a strategy for discovery. A clear methodology for transparent disposition of the case is outlined in the file notes, and adjuster opinions and counsel opinions are documented. • Follow up/Controls. Adjusters should meet regularly with appropriate pool personnel to review files and formulate claim resolution strategies. In addition, review of critical claim files, ongoing litigation, and case strategy recommendations are part of best practices. • Supervision. A claim supervisor is responsible for overseeing all claims adjusting activity. The role is to provide direction to adjusters (i.e., handle claims and be available for consultation on complex or unusual claims). • Excess/Special Reporting. Notification should include any demands above appropriate noti- fication of the carriers of any additional layers of coverage (AGRiP 2012). Legal Counsel Services Legal counsel services include claims defense, corporate secretary, and regulatory advice. Actuary services include rating and reserve reviews. Investment management services include strategy advice, policy implementation, and reporting required by the state. Brokerage Services Brokerage services include placement of excess commercial and stop-loss insurance as required and keeping the pool abreast of commercial insurance market conditions. Audit Services Audit services include providing information to help actuaries build financial statements and achieve pool goals of improving efficiency and performance. Table 5 presents the expected pool service provider costs.

Phases to Create and Operate a Transit Pool 25   3.7.4 Pool Management Agreement The agreement for pool management services must address the following foundational issues: appointment and authority; compensation; term and termination; management responsibilities and limitations; confidentiality; and indemnification. The pool should be willing to indemnify pool management for all functions within the defined scope of activities and services. 3.7.5 Service Provider Procurement Whether pool management decides to adopt formal procurement procedures, it should at least adopt and adhere to the best practices in procurement. Competition is the bedrock prin- ciple of public procurement. The pool should request proposals, negotiate with all proposers in the competitive range, and request proposal offers in a form that can be simply accepted by the pool to constitute a contract. When acting on the pool’s behalf, the pool management firm and service providers should be indemnified by the pool. All other contractor and vendor services should be obtained under a written contract. The contracts should require contractors and vendors to indemnify the pool for liability for which they are in whole or in part liable under the law and fund that indemnity with commercial insurance. 3.7.6 Ratify Pre-Organization Meeting Actions Ratify the pool management’s actions by filing the pool’s application for its certificate of authority and adopt the pool’s treasury controls and investment policies as established by state statute, including the following: • Ratify organization documents, bylaws, pool coverage documents, and pool underwriting process. • Ratify and sign the pool management agreement and select the pool service provider. • Delegate authority to the pool management and the pool service provider to open bank accounts and issue coverage documents. • Authorize the purchase of reinsurance insurance (if any) excess or stop-loss. • Authorize the issuance of COCs. • Obtain contributions (must be in cash) from all pool members. 3.8 Phase 8: Establish and Operate Board Pools are managed by a board of trustees or board of directors; the Guide refers to both as the “board.” This section describes the purpose and structure of a board and its responsibilities. Further best practices are included in Appendix D. Responsibility Expected Cost (1) Board and Pool Manager Maximum rate: 23% of Total Pool Contributions Source: Direct observation while managing one shared-risk pool and two self-insured programs for the Union Pacific Company. Interviews with pool service providers. (1) As a result of economies of scale, pool service provider fees expressed as a percentage of gross contributions will substantially decrease as the total contributions increase. Table 5. Expected pool service provider costs.

26 Shared-Risk Insurance Pools for Transit Agencies: A Guide 3.8.1 Purpose and Structure of the Board Selecting the pool’s board and setting up its smooth operation is of upmost importance to the pool’s long-term financial and operational health. Purpose A board’s primary purpose is to ensure the pool meets its goals and formulates policies sup- porting those goals. Without engaged, experienced, and skilled board members, the pool may fail to meet statutory requirements and recognize opportunities to improve its performance. Structure Most pools should have a representative from each member on the board, and state regula- tions may mandate the minimum number of board members. The size of the board will be influ- enced by the number of planned members as well as any state restrictions. Small pools (fewer than 10 members) may choose to have a representative from each member, while larger pools may elect a board of five to nine members. If a pool chooses to have more than nine members on the board, the pool should consider in its bylaws or other organizing documents authorizing an executive committee to carry out routine board functions. When selecting the board, agencies should consider including at least one attorney, one consul- tant experienced with shared-risk pool operations, and one chief financial officer. To function effec- tively, the board must have these foundational skills. State statute or the establishing documents may provide for ex officio board members, board members from a specific group, or non-voting members who may serve coordinating or other institutional functions. However, a shared-risk pool board’s primary duty is to the pool and through the pool to its membership; such designation of board positions is not common for shared-risk pools. Initially, the board’s focus will be on opera- tional procedures. However, the board’s most significant value is to concentrate on broader policy issues. The pool will evolve as government, social, and economic issues evolve. The board needs to remain informed concerning matters that may affect pool operations and financial viability. Performance Standards While pools may wish to benchmark their performance against other pools that have similar structures and operating objectives, published statistics with financial or other key information about individual pools are rarely available. Consequently, board members must set their own performance standards. Successful pools benchmark against themselves, seeking to refine their operating procedures and maximize the impact of their mission statement through the strategic planning process. A pool’s strategic planning meeting should begin with an evaluation of the pool’s performance against its mission and purpose. 3.8.2 Responsibilities of the Board The responsibilities of the board should be clearly defined and documented. This section describes activities the board should undertake. Regulatory Management The board is responsible for compliance with state regulations, record retention, financial accounting, cash management, and disbursements. Program Management Program management functions of the board are broad and may include the following: • Addressing member satisfaction with pool operations – Marketing (retention of existing and addition of new members)

Phases to Create and Operate a Transit Pool 27   • Monitoring underwriting practices • Servicing coverage documents • Management of claims – Claims supervision and recoveries – Claims investigation and settlement – Claims defense – Claims reserves • Excess/stop-loss commercial insurance placement • Legal and litigation management – Selection of counsel • Corporate secretarial and adjuster performance (in-house or third party) • Actuary selection and management • Rate development • Annual claim reserve reviews Working through pool management and the pool service providers, the board should monitor the essential functions and activities of the pool (state statutes and regulations will also dictate the board’s functions and activities). Additional Board Functions The board is also responsible for the following: • Monitoring and managing capital adequacy, deficit assessment, and investments (if needed and allowed by state law) as well as auditing, financial functions, and potential dividends to be shared with pool members. Special assessments may be allowed to be issued by the board should pool liabilities exceed its assets. • Appointing a chair and declaration of quorum. • Ratification of acts of pool management and officers since the previous meeting and approval of prior meeting minutes. • Approval of audit statements, underwriting reports, and claims reports. • Reviewing the annual investment report and presenting interim financial statements. • Carrying out risk management procedures and complying with state regulations. Provider Performance Review The pool’s management firm’s and service providers’ performance should be regularly evaluated against the functions of their position as outlined in this Guide and the goals and objectives of the pool. A comprehensive annual evaluation by the board is recommended. 3.9 Phase 9: Define Pool Management Activities The pool will need to identify whether it would prefer management to be handled internally by pool members or externally by a hired firm. The pool management entity functions as the primary contact with members and the board and ensures compliance with all regulations. The entity leads in developing business plans; creating proforma financial statements; maintaining the pool’s financial and operational records; monitoring risk management functions and under- writing expertise; and managing the pool service providers. Initially, pool management may not be required to provide all functions due to the small size of the pool. As the pool grows, pool management must have the capability to provide all functions if and when needed. The pool has a fiduciary responsibility to the state, which requires that pool management be continually monitored (see Figure 10). See Section 3.7.3 for more information on service providers.

28 Shared-Risk Insurance Pools for Transit Agencies: A Guide 3.9.1 Annual Pool Management Activities Pool management activities that should occur on an annual basis include the following: • Developing rates. • Assessing the legal environment (e.g., a sovereign-immunity-liability limit may apply). • Determining licensing procedure (including working with state regulators to obtain a certifi- cate of authority and annual renewals requirement if applicable). • Providing the pool with a checklist of regulatory requirements to ensure requirements are met on a timely basis. • Assessing the need for reinsurance (excess, stop-loss, etc.). 3.9.2 Operating Systems Operating systems include underwriting, rating, claims administration, and member services as well as loss and insurance recoveries. In addition to paying losses and collecting contributions, pools must manage layered insurance recoveries and liabilities. When an excess or stop-loss insurer pays a claim, it typically has a contractual, if not a statutory or common law, right to subrogation (unless waived). Subrogation is the right of an insurer or reinsurer, after payment of a loss, to recover the amount of the loss from one legally liable to the insured for it. Insurers who pay losses can obtain recovery from intermediate insurers whom they insured or from a negli- gent party (tortfeasor) or their insurer. Technology assistance in recording claims, adjustments, advances, and settlements will be important, as technology is an essential tool for minimizing costs and expenses and gaining the knowledge to take advantage of a pool’s inherent benefits. Member services include the pool service team, orientation/onboarding of new members; regular coordination and training visits; interaction with local insurance brokers/agents; help- ing with the retention of existing members and attracting new members; and coverage renewal assistance. Member services and marketing more broadly may also include publications, website management, and surveys. Figure 10. Pool management cycle.

Phases to Create and Operate a Transit Pool 29   3.9.3 General Ledger (Monthly/Quarterly) Financial statements, regulatory filings, and investment guidance (as permitted by state statute) are products of an accounting system. All pool accounting systems are based on Government Accounting Standards Board (GASB) 10, which establishes financial and reporting standards for state and local government entities’ risk financing and insurance-related activities. GASB 354 sets financial reporting requirements for state and local government entities. The general ledger accounting systems are externally secured to the banking and investment accounts. Reliability of the general ledger accounting system as well as security of the banking and investment funds are supported monthly by reconciling the general ledger accounts to the external bank and invest- ment accounts. The general ledger accounting system is the basis of financial audits and corporate secretarial services requiring financial data (assisting with board meetings and maintaining a corporate book). The general ledger accounting system triggers collection and distribution of pool funds. 3.9.4 Management Information Systems A system for capturing underwriting reporting claims information is essential. A system for financial information, which requires both a general ledger system (see Section 3.9.3) and a system to capture incurred and paid loss information by fiscal and underwriting year, policy, and reinsurers, is also needed. The pool operations plan needs to document the data collection responsibilities; data entry processes; flows of information between systems; and outputs, includ- ing reports, collections, and distributions of funds. 3.9.5 Planning Planning for the future is another important function of pool management. Management will be responsible for tracking and auditing, reporting, renewal, and terminations of commer- cial insurance policies (stop-loss, excess insurance, fronting coverage, if any). Management also needs to be experienced in policy application preparation, submission, coverage negotiations, and purchasing. Additional responsibilities include managing membership, retention, acquisition growth, and member satisfaction. Coverage document management includes initiating, autho- rizing (with legal counsel), editing, negotiating, and approval. See Phase 6 for a discussion of the operations plan. 3.9.6 Data Gathering Data gathering largely overlaps with the accounting process. It includes documenting losses, exposures to risk, expenses, and actuarial studies (engaging and working with actuaries for the exploratory and feasibility studies and annual reviews). Data from the operating system are utilized for the accounting process. At this step, entries are made in the general ledger of the pool’s financials, and regulatory reports are prepared. While the pool’s business cycle is annual, the distribution of management information compiled from internal and external sources is usually driven by transactional system reporting. So, within the annual cycle, there is typically a series of monthly or quarterly cycles before the distribution of the year-end reports, including the inde- pendent audit filed with regulators and provided to pool owners or members. 3.10 Phase 10: Operate Pool The pool is member-directed. Members share accountability for the pool’s success or failure. The pool is an extension of its membership, and each member is a co-owner. Pools are locally controlled; they have “skin in the game,” with a singular goal of servicing their membership.

30 Shared-Risk Insurance Pools for Transit Agencies: A Guide The pool is also a separate legal entity; members must collaborate but not directly interfere with the daily operations of pool management. Pool members, the board, pool management, and the pool service provider(s) form a partnership, and they must embrace that obligation by keeping their operating relationships in balance. Pool operations include working with the board on regulatory compliance and creating and distributing necessary coverage documents, described as follows. 3.10.1 Regulatory Compliance Pool management should develop and provide the pool’s board with a compliance checklist to assist them in maintaining good standing with regulators. This checklist should include specific requirements, regulations, due dates, required actions, and documentation. 3.10.2 Coverage Documents The pool will need to create and continually review and distribute coverage documents (links to sample coverage documents are provided in Appendix A). Coverage documents should include the following: • Declarations. This section identifies the insured, what risks or property are covered, the cov- erage limits, and the coverage period (i.e., the time the coverage is in force). • Coverage Agreement. This section summarizes the major promises of the pool and states what is covered. There are two primary forms of an insuring agreement: – Named-perils coverage, under which only those perils specifically listed in the coverage documents are covered. If the peril is not listed, it is not covered. – All-risk coverage, under which all losses are covered except those expressly excluded losses. If the loss is not excluded, then it is covered. – Exclusions. This section takes coverage away from the coverage documents. The following are three major types of exclusions: ◾ Excluded perils or causes of loss ◾ Excluded losses ◾ Excluded property • Conditions. This section contains provisions in the coverage documents that qualify or place limitations on the pool’s promise to pay or perform. Common conditions in coverage docu- ments include the requirement to file proof of loss with the pool, protect property after a loss, and cooperate during the pool’s investigation or defense of a liability lawsuit. If coverage document conditions are not met, the pool can deny the claim. • Definitions. This section defines specific terms used in the coverage documents. • Endorsements and Riders. Endorsements and riders are written provisions that add to, delete, or modify the conditions in the original coverage documents. This section may change the language or coverage of a coverage document at renewal. • Contribution Indication Notices. Contribution indication notices will generally be issued to pool members 3 months before the coverage document’s renewal date(s). The contribution indication notice will also indicate the pool’s current coverage(s), the coverage limits, and the contribution amount required for each coverage. • Issue COCs. A COC is a certificate of insurance (COI) in the commercial insurance industry (ACORD Form 25). A COC contains all the pool’s coverage document’s essential details. The COC is intended to prove a coverage document’s status and provide quick third-party access to its coverage details. Unless sovereign immunity/tort liability limits the state’s liability,

Phases to Create and Operate a Transit Pool 31   obtain and maintain reinsurance, excess, or stop-loss insurance policies (if applicable). See “Stop-Loss” in the References and Resources section. • Disbursements. This includes money paid out to operate the pool, claim payments for losses, cash expenditures, dividend payments, legal fees, and so forth. • Liquidity. Liquidity is the amount of cash and cash equivalents (assets that can be readily converted to currency with no loss of principal) available to pay claims and general operating expenses. • Investments. Pool investments can play a critical part in maintaining pool liquidity. Pool con- tributions and other contributions must be greater than claims, pool cost, and pool expenses. They must be closely monitored and fully comply with the state’s investment policy. • Litigation. Litigation includes selecting and managing defense and coverage issues, expert witnesses, alternative dispute resolution, trial preparation, and so forth. • Budgets. A detailed and realistic budget is one of the essential tools for guiding the pool. A budget provides vital information for operating within your means, managing unexpected challenges, and maintaining financial viability. • Marketing. Pools’ competitive, economic, political, and litigation environment continually evolves. Pools need to adapt to their evolving environment, attract new members, retain existing members, and educate state leaders. The pool will need to continually market to keep current members and add new members as it matures. • Coverage. Consider covering the members as broadly as possible (see the coverage matrix in Appendix B). If a pool’s losses and payout characteristics are reasonably predictable based on historical data, it is not difficult to project the degree of success a pool may experience. Casualty lines of coverage usually lend themselves best to pooling because they have a higher degree of predictability for frequency, severity, and payout patterns than other lines of coverage. This matrix illustrates the types of coverage most often covered by municipal pools.

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 Shared-Risk Insurance Pools for Transit Agencies: A Guide
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Transit agencies are finding it increasingly difficult to find, purchase, and maintain adequate and affordable insurance coverage for public transit vehicles. The number of smaller insurance providers is decreasing due to the volatile nature and demands of the insurance industry and insurance coverage requirements in general.

NCHRP Research Report 1079: Shared-Risk Insurance Pools for Transit Agencies: A Guide, from TRB's National Cooperative Highway Research Program, explains how insurance pools function, how to evaluate the feasibility of a shared-risk insurance pool, and how to establish and manage this type of pool.

Supplemental to report is a presentation and NCHRP Web-Only Document 374: Developing a Guide to Shared-Risk Insurance Pools for Transit Agencies: Conduct of Research Report.

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