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Capital Efficiency – Maximizing the use of your Dollars

February 25, 2019 Fiscal Responsibility, Insider, Core Values

Capital_Efficiency

Fiscal Responsibility is one of the Pool’s four core values. In that vein, TMLIRP serves in a fiduciary capacity in managing contributions by the Members for the purpose of sharing risk. It is incumbent upon the Pool to manage these funds responsibly. Capital efficiency is an aspect of the Pool’s Fiscal Responsibility.

Capital efficiency is defined as a measure of the return on capital that is expended or invested. In the Pool’s case, it is the ratio of the amount of coverages and services that the Pool provides given its overall financial condition divided by the amount of expenditure applied to provide those services.

Both strategically and operationally, the Pool endeavors to continually maximize members’ return on their investments.  There are three basic ways that the Pool can generate a return on its investments.  One is through the Pool’s underwriting and loss control operations (operational investment), another is through receiving income on investment instruments (investment income), and the third is a blend of the two. 

About 90% of the Pool’s income is generated through its operations, so it is in this area that the Pool can have the most impact. Over the past couple of years the Pool implemented several measures that were focused on increasing its return on its operational investment.    

Purchasing additional reinsurance– This action decreased the Pool’s exposure for losses up to $200 million by $37.5 million and added an additional $62.5 million in outside reinsurance protection. By rebalancing the Pool’s reinsurance structure, it was able to provide members with additional protection at a cost of $800,000 and at the same time reduce its capital (members’ equity) requirement by $72.3 million.

Updating property policy coverage – The Board adopted policy coverage changes that limits the Pool’s exposure to property losses to 150% of the declared value and sets maximum limits on flood losses. The first action incentivizes members to more accurately record the value of their assets and also aids the Pool in properly underwriting coverage for those assets, which has the effect of improving equity among the members of the Pool. The second action helps members plan and prepare for damage caused by floods and provides protection for all of the Pool’s members at a level and cost not available in the private market by controlling the amount of losses that can result from flood disasters.

Property Valuation Program – To assist members in determining and updating the value of their utility plants, the Pool engages professional engineering and property valuation firms to conduct assessments of municipal utility operations. This action provides the Pool with standards for assessing and updating the value of the operations for underwriting purposes and assists members in the establishment of more accurate values for these type facilities.

Utilizing captive reinsurance arrangements – One of the Pool’s reinsurers is the National League of Cities Mutual Insurance Company (NLC Mutual).  This entity is a captive reinsurer that was created and is operated by its members.   NLC Mutual’s investment structure is much broader than the Pool’s and the Pool has had success with NLC Mutual growing the Pool’s deposit and accumulated earnings through their investment program.  The Pool has had similar success with the provider of its pension program (TMRS) investing its deposit with that entity.

Upgrading all of its business software applications – Four years ago, the Pool completed development of a new state-of-the-art claims processing system. This past year, the Pool developed a new finance, accounting and payroll system, and a new user-friendly website.  The Pool is currently developing new best-of-breed policy and billing systems, and a new medical bill review system.  Each of these systems are designed to increase process efficiency, and to make it easier for members to do business with the Pool.  By the end of this fiscal year, the Pool will have replaced all of its legacy systems with advanced processing systems based on new technology.

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The remaining 10% of the Pool’s revenue generating operation, investment income, is managed jointly through two internationally recognized investment firms and an in-house Chartered Financial Analyst (CFA/CPA) investment manager.  Many of the Pool’s claim payment obligations extend 30 to 40 years.   Investments are made in compliance with the Texas Public Funds Investment Act, but because the Pool invests a majority of its assets in long term investments and has the ability to hold them to maturity, as is annually verified by the Pool’s investment custodian, the Pool is able earn very competitive returns.

Going forward, the Pool will continue to examine options to enhance capital efficiency. Two examples include: the potential for purchasing reinsurance for catastrophic workers’ compensation losses; and the possible use of specialized captives that would allow the Pool to improve upon its return on investment.   Maximizing the Pool’s return of investment and progressing towards capital efficiency is an ongoing process, one that the Pool continues to develop, build on, and achieve. It’s the fiscally responsible thing to do, particularly since the benefits of this effort inure to the benefit of the member. 

The Texas Municipal League Intergovernmental Risk Pool is the leading provider of workers’ compensation, liability, and property coverage for local governments in Texas. Founded in 1974, we are the oldest and largest pool of its type in the United States, serving over 2800 governments and political subdivisions. We are driven to continue the mission that began over 40 years ago, providing our members with a tailored risk financing system through reliable partnership, performance, and service. To contact us, please visit www.tmlirp.org

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