For The Record

White Paper Response

A Message From Schools Excess Liability Fund's Board Chair

SELF has received numerous requests for a response to the "White Paper" recently issued and circulated among some of SELF's members which raised financial and coverage issues about the SELF program. Two groups issued the document and both have recommended their members withdraw from SELF membership as a result of these issues.

As you know, SELF is a non-profit, member-owned and member-governed Joint Powers Authority. A number of founding members of SELF continue to serve in governing roles today. In the mid-1980s, many of you were instrumental in helping create this alternative industry to protect our school districts when the commercial insurance market chose to abandon our public school districts and community colleges throughout the state. Because of your contribution, SELF is a 1,559-member organization, serving 6,203,544 student populations.

The formation of SELF (our state-wide excess pool) paved the way to provide excess liability protection to many school districts and regional pools. It also spawned an industry that allows school districts to never again have to rely solely on the commercial insurance market for protection. It also kept the commercial insurance market from price gouging since SELF became a benchmark for rate comparison within the industry. Over the ensuing years, millions of dollars have been saved, and substantial rebates of premium equity have been returned. School districts have enjoyed the security of a 1,559-member organization to protect each other from the risks inherent in public education service delivery. SELF's current challenges are reflective of the challenges that our members face.

Decrease in Net Assets
The consolidated net asset decline in SELF is due primarily to the deficit position of the workers' compensation program. The deficit is based on the actuarially projected loss trend for incurred but not reported (IBNR) losses. The IBNR projections far exceed the reserves on actual reported claims that have accumulated over 18 years of program operations. Since these loss developments impact SELF's bottom line, these IBNR projections are actuarially re-evaluated every six months to ensure our financial positions and projections are accurate.
SELF supports it Excess Liability Program members by providing them with excess liability limits above their primary liability limits. Since the workers' compensation program and the liability program stand on their own fiscally, Excess Liability Program members are not adversely impacted by the deficit position of the workers' compensation program that is reflected in the consolidated net assets of the two programs combined.

Workers' Compensation Program Deficit
Typical of other excess JPAs, SELF's workers' compensation program is underfunded and there is a substantial deficit in the program. A deficit recovery plan is in place, and we are grateful for the loyalty of our members in that program who meet their obligations in light of the fiscal constraints we all face. Many school districts have experienced the escalating workers' compensation costs that have gone unabated for years. This has resulted in rising premium assessments in their own primary and excess workers' compensation programs. Only recently, with legislative relief, have school districts finally experienced a decline in such costs. We are confident that, with the adoption of a fiscally responsible recovery plan, coupled with future declines in workers' compensation costs, SELF's financial recovery in this program will be sustained.

Realized Investment Loss
With the economic volatility attributable to natural disasters and funding of the wars in the Middle East, SELF's investment advisors recommended the repositioning of the SELF investment portfolio from short-term investments (under one year) to longer-term investments (between one and five years) to capture a greater rate of interest return. This repositioning of investments is not an investment loss as titled under the White Paper, but rather a comparison of the transition of ($13+ million) short-term investments to long-term investments between 2004 and 2005 fiscal years. The active management of SELF's investment portfolio allowed SELF to earn in excess of $10 million dollars in interest for the two fiscal years combined.

Inadequate Reinsurance
While SELF has also experienced escalating costs in the liability program, this program continues to be actuarially sound. Additionally, part of your premium contribution to the excess liability program has been directed to a contingency fund for added protection should the aggregate limits of the reinsurance policies be exhausted.

Inconsistent Coverage Document
SELF's excess liability memorandum of coverage was designed by its members to offer broad protection for its members. While the coverage wording differs from that of our members' underlying program, in all practical terms, SELF has successfully partnered with its primary JPAs, to meet our mutual members' claim/coverage needs. Any differences between the forms have not resulted in any loss of coverage at the SELF level.

The strength of any JPA is predicated upon its membership's commitment to support each other and to the organization as a whole. Whether you are a founding member of SELF or a member who subsequently joined when you were unable to obtain competitive pricing in the commercial insurance market, all members over the years have benefited from the security and safety net of SELF. As the commercial insurance market has proven time after time to be cyclical, volatile, and profit-driven, public education is best served when we pool our resources together and stand resolved in support of all the JPAs in the state to ensure that the pooling industry is a permanent risk financing alternative to the commercial insurance market for public schools.

We value your membership in SELF and the years of support you have given us. The SELF Board is making great efforts to position the SELF JPA to meet the future needs of California's educational agencies for excess coverage. We hope you will choose to continue your partnership with us to achieve these goals.

Michael D. Gregoryk
SELF Board Chair