The report stated that staff and Marsh Risk & Insurance Services (Marsh), the District’s insurance advisors, recommend that the District review its need to maintain coverage under the Bridge Insurance policy, given the fact that the District received a renewal quote for this policy that would increase the premium cost by 21.3%. The report noted that given this significant increase in cost, the District should consider whether or not the risk transfer achieved by this policy is worth the cost. The report provided information on alternative options to a full renewal of the policy, including a renewal quote that cuts the coverage limits in half and a non-renewal option.

The report described the current market conditions in the property class of insurance, noting that the major hurricanes of 2005 have put pressure on insurance carriers to implement significant increases on property insurance rates, particularly for properties with catastrophic exposure such as the Golden Gate Bridge. The report stated that Marsh marketed the District’s Bridge Insurance policy to carriers in the United States, the United Kingdom, Europe and Bermuda, but only the District’s incumbent carrier, ACE, was willing to provide a quote for this insurance, which excludes both terrorism and earthquake coverage. The report described the two renewal options, as follows:

1. Full Renewal of Existing Coverage: This renewal option includes a self-insured deductible of $15 million and provides for a $25 million limit on physical property damage and a $25 million limit on loss of use with a 30-day waiting period, at a cost of $1,289,688 (a 21.3% increase from 2005).
2. Alternative Renewal: This renewal option includes the same deductible of $15 million, but with one-half the limits in the expiring program, including a $12.5 million limit on physical property damage and a $12.5 million limit on loss of use with a 30-day waiting period, at a cost of $794,448.

The report also described the non-renewal option, noting that Marsh has suggested that the District determine the value of the Bridge Insurance policy after comparing the extent of the protection provided against the premium cost, deductible exposure, the rising replacement value of the Bridge and the increased revenue stream. The report posed the question of whether it would be in the District’s best interest to self-insure this exposure or incur the high premium cost to transfer the risk. The report explained that when the high deductibles and relative low limits provided by the Bridge Insurance policy are factored in, the District is currently self-insured in excess of $40 million for physical property damage and 30 days plus $25 million for loss of use. The report noted that prior to the recession of 2000/2001 and the terrorist attacks of September 11, 2001, the District had very favorable terms for the Bridge Insurance policy, with limits as high as $100 million for physical property damage, a significantly larger coverage area (from Doyle Drive to the Richardson Bay Bridge in Mill Valley) for the loss of use coverage and premium costs at less than half of the current premium.

The report listed important factors to consider regarding the decision whether or not to renew the Bridge Insurance policy:

• Progress of the Golden Gate Bridge Seismic Retrofit Project: With the completion of Phases I and II of the Golden Gate Bridge Seismic Retrofit Project, the District has greatly reduced its exposure to catastrophic seismic events.
• Increase in the District’s Reserves: The District has built up its reserves to fund future capital projects and to fund long-term liabilities, and the availability of these funds would allow the District to function after a catastrophic event (although the District would later have to repay the funds or alter the current capital plan).
• Bridge Property Reserves: The annual premium paid for the Bridge Insurance policy, approximately $1.3 million, could be used to develop Bridge Property Reserves that would be available to be used during a catastrophic event. These types of funds are used by other public and private organizations to manage their risks and would have the added benefit of strengthening the overall financial health of the District.
  

The report noted that the long-term risk of self-insurance could be substantially mitigated by building a contingency fund, such as the Bridge Property Reserves described above. Using yearly premium dollars only, such reserves would take 13.5 years to develop a fund for the loss of use portion of the coverage limits and a total of 23 years to develop a fund equivalent to the coverage limits in the entire Bridge Insurance policy. A copy of the report is available in the Office of the District Secretary and on the District’s web site.

At the meeting, Mr. Wire introduced Risk Management/Safety Director William Stafford, as well as Frederick Robinson from Marsh Risk & Insurance Services (Marsh) and summarized the staff report. Mr. Wire highlighted a chart attached to the staff report, in which the renewal and non-renewal options were compared in terms of deductibles, property damage coverage, loss of use coverage and costs to the District. Mr. Wire noted that even though the District is mitigating the most significant risk facing the Golden Gate Bridge structure by undertaking the Seismic Retrofit Project, the insurance carriers have not taken this mitigation into consideration by lowering premium rates for the District. Mr. Stafford noted that with such a high deductible for the Bridge Insurance policy, the District is receiving a narrow band of insurance for a relatively high premium. Mr. Robinson noted that ACE, the only carrier that provided a quote for the District’s Bridge Insurance policy suffered $550 million in losses in 2005 due to the catastrophic hurricane season, and is under a mandate to raise their premiums by up to 50% across the board, even for insureds that have had no major losses. Mr. Wire added that four years ago, when the Board of Directors last considered not renewing the Bridge Insurance policy due to sharply escalating premium costs, there was a concern from bond rating agencies that the policy needed to be retained by the District, due to the fact that the District had taken on Commercial Paper debt, and had much lower reserves than the District has at this time.

Discussion ensued, including the following:

• Director Shahum made the following inquiries:
  • She inquired as to why the District received a quote for the Bridge Insurance policy from only one carrier. In response, Mr. Robinson stated that property insurance market for bridges and tunnels is very small, with only two carriers, ACE and Lloyds of London, willing to write policies for properties such as the Golden Gate Bridge.
  • She further inquired as to types of risks that would be covered by the Bridge Insurance policy, if terrorism and earthquake peril are excluded. In response, Ms. Kupersmith provided some hypothetical examples of damage to the Bridge that would be covered by the Bridge Insurance policy. She also clarified that for the physical property damage component of the Bridge Insurance policy, terrorism and earthquake are excluded; however, for the loss of use component, terrorism is excluded but earthquake is covered.

• Director Cochran inquired as to whether the District has ever purchased a large excess/umbrella insurance policy that covers damages higher than $100 million. In response, Mr. Wire stated that the District has never retained such a policy.

• Director Eddie expressed his support for the District to become self-insured with respect to the Bridge Insurance policy, and cautioned that if the Bridge Property Reserves are established, it would be prudent to ensure that the funds are not used for non-catastrophic purposes.

• Director Boro made the following inquiries and suggestions:
  • He inquired as to whether the premium for the Use and Occupancy portion of the policy could be calculated separately. In response, Mr. Robinson stated that the two components of the Bridge Insurance policy, the Physical Damage and the Use and Occupancy (sometimes referred to as business interruption insurance), are interconnected and are considered uneconomical by insurance carriers to be written as separate policies.
  • He inquired as to whether there was a risk of any damage to the Bridge during Phase III of the Seismic Retrofit project, which will retrofit the suspension span portion of the Bridge structure. In response, Mr. Mulligan stated that since only small portions of the Bridge structure will be retrofitted as part of Phase III construction work, there is minimal risk of damage to the Bridge structure.
  • He expressed his support for the District to become self-insured with respect to the Bridge Insurance policy and requested that staff investigate what other bridge authorities are doing regarding the question of whether to purchase property insurance or become self-insured.

• Director Newhouse Segal inquired as to whether any other large bridge structures around the world were self-insured. In response, Mr. Robinson provided the example of a major bridge in Michigan, which used to be covered by a traditional property insurance policy, and is now self-insured.

• Director Moylan inquired as to whether a policy could be set to limit the use of the Bridge Property Reserves that would be binding on future Boards of Directors. In response, Attorney Miller explained that while it would not be possible to bind future Boards to such a policy, the Bridge Property Reserves could be designated as “Restricted” reserves which could only be used for the established purpose. Ms. Kupersmith added that the Bridge Property Reserves would be set up with documentation clearly identifying its purpose as a self-insurance risk pool to cover catastrophic loss to the Bridge.

• Acting Chair Pahre made the following inquiries and comments:
  • She suggested that if the Bridge Property Reserves are established, it would be prudent to include a provision that if the amount of funds in the reserves fell below a certain point, then the Board would revisit the question of whether or not to be self-insured. Ms. Kupersmith stated that it is staff’s intention to provide the Committee and the Board with the opportunity to review the property insurance market every year to make sure that self-insurance is the most practical option for the District.
  • She suggested that if property insurance carriers increase rates each year, then the District should increase the amount of the annual contribution to the Bridge Property Reserves accordingly.
  • She suggested that guidelines be established for the Bridge Property Reserves, to determine the specific types of losses or damage to the Bridge that would be paid out of those reserves. In response, Attorney Miller provided the example of the Liability Reserves, which was also set up as Restricted Reserves. He noted that it would be prudent to define the purpose and intended use of the Bridge Property Reserves, which would be used to fund the types of risks now covered by the Bridge Insurance policy up to a certain threshold.
  • She expressed her appreciation to the representatives of Marsh, who helped guide staff and the Committee regarding the question of whether to purchase property insurance or become self-insured.

• Ms. Kupersmith commended the contributions of Risk Management/Safety Director William Stafford, who provided fresh insight and industry knowledge to this year’s insurance renewal cycle.

Action by the Board - None Required