By STEVEN E. AAVANG

IRMA: the nation's largest municipal insurance co-op

Risk management, safety education and hard work has added up to a self-insuring plan which has saved 22 suburban municipalities $1 million the first year; $2 million is expected in savings for 1980

THE MANAGERS and finance directors of 22 Illinois cities have begun to see four years of effort pay off. The Intergovernmental Risk Management Agency (IRMA), a unique and innovative venture in intergovernmental cooperation has completed its first year of operation. IRMA has saved the citizens of these 22 suburban municipalities approximately $1 million dollars. A $2 million dollar saving in 1980 is projected. The program has received national attention for both its dramatic savings and for its improved insurance and risk management programs.

IRMA evolved from a seminar held in May of 1976 where 69 municipalities in northeastern Illinois met to examine the problems associated with municipal insurance. Rate increases had become traumatic with many cities citing annual premium increases ranging up to 400 percent. Some municipalities were unable to get bids on their insurance needs.

Twenty-one municipalities decided to participate in an innovative program with three objectives: (1) review and analysis of individual municipal insurance portfolios, (2) consideration of nonconventional and cooperative intergovernmental insuring alternatives, (3) implementation of an acceptable option. A steering committee was formed with the assistance of the Illinois Department of Local Government Affairs (recently reorganized into the Illinois Department of Commerce and Community Affairs). Risk Planning Group, Inc. of Darien, Conn., was retained to sift through the welter of municipal insurance policies and programs and then provide recommendations. The goal was broader and more economical risk coverages on property, automobile, general liability, and workers' compensation insurance. It was clear that the realization of this goal would result in the nation's most comprehensive cooperative insurance program for local government.

The consultants listed each municipality's liabilities, total cost of insurance premiums, number of claims filed, and total amount of claims paid by the governments and insurance companies. Due to the great disparity between the amount paid for insurance premiums and the amount paid in claims by insurance companies, the consultants recommended a self-insurance program. They also recommended that the municipalities adopt risk management practices in order to reduce claims. These practices include safety education and training of employees; preventive measures to eliminate municipal hazards and liabilities; and an aggressive approach through management and legal means to limit claims filed, particularly those deemed dubious or excessive.

As a result of these recommendations, the study group retained the Chicago law firm of Ancel, Glink, Diamond and Murphy to draft the municipal intergovernmental agreements necessary to implement the plan. Gallagher Bassett, a subsidiary of Arthur J. Gallagher Company of Rolling Meadows, was hired to put together an "excess insurance package" (to cover losses over $250,000 which would not be paid by the self-funded pool) and to act as the program's claims administrator and risk manager.

The study committee ceased operation on January 1, 1979, when 14 of the original 21 members of the study group cancelled their conventional insurance programs and joined the intergovernmental agency under the powers of the Illinois Constitution (Article VII, sees. 6 and 10) and the Intergovernmental Cooperation Act, (Illinois Revised Statutes, Ch. 127, sec. 746). IRMA was thus established.

The goal was broader and more economical risk coverages on property, automobile, general liability, and workers' compensation insurance

The details

IRMA became one of less than a dozen municipal intergovernmental efforts in self-insurance in the nation. As anticipated, it also became the most comprehensive plan of its kind in the country. As reported by Bert Mochel Jr. of Gallagher Basset: "[T]he municipalities could expect to reduce their annual insurance payments by approximately 38%, to have broader insurance coverage than they had previously had, to have an extensive loss prevention and risk management program [absent in many of the municipalities prior to IRMA], to achieve uniform claims handling, to achieve economies of scale, and to receive the benefits of interest received on invested pool contributions which had been previously paid as premiums to insurance companies.

"Each municipality must cover the first $1,000 loss for any claim. The next $249,000 in coverage per occurrence is paid out of the funds of the self insurance pool to which each municipality makes an annual contribution. That contribution, as originally determined by Risk Planning Group, Inc., is based upon the annual revenues

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of each city. In their study the highest correlation of claims was matched to the amount of revenues of the municipality. Coverages in excess of the $250,000 pool limit per occurrence are purchased jointly for all communities from the 'conventional insurance market' with a maximum limit per occurrence of $5,000,000 on general liability and $10,00,000 on property."

The contributions for the first year were established at $1.74 per $100 of collected revenue. The rate is determined each year by the board of directors. As more data are obtained, IRMA will have a better fix on the actual costs and savings to the members. But, based on experience over the first 10 months, it is estimated that this year's agency costs will be $2,570,000 compared to an estimated $4,575,000 under the conventionally insured scenario. The "present value" savings will be $2,005,000 (direct savings plus investments on pool funds).

Municipalities joined IRMA by adopting an ordinance which included the by-laws and amendments of IRMA and which stipulated a five-year minimum commitment to the agency. IRMA is operated and governed by a board of directors consisting of a designated delegate and an alternate from each municipality.

IRMA attorney Steward Diamond summarized the key elements of the bylaws as follows:

"The Board operates on a one village, one vote basis. Municipalities must pay an annual contribution to the agency for the purposes of: (1) establishing a pool to pay off valid claims greater than $1,000 and up to $250,000, (2) to purchase excess insurance coverage to cover claims over $250,000, (3) to pay administrative costs of the agency."

Legal assistance is a vital element of the IRMA program. The major activity of the law firm is to represent the member municipalities of the agency in litigation relating to claims. There is another unique function for which counsel has been retained: legal education. While a vast majority of the claims are for injuries and damages, the claims which have the potential for the greatest costs are liability claims.

This legal education will provide police officers, nonpublic safety municipal employees, and municipal officials and top administrators with a background in the development of law and cases, a knowledge of the actions which present liability, and advice on ways to avoid liable acts and possible litigation.

The services

From the start, risk management has been seen as the most important aspect of the program. The pooling of resources and an aggressive policy on defense against claims will produce significant savings in the long run. More important, the reduction or elimination of the risk for liable, damage and hazardous situations will make the municipalities better places to work and live.

Gallagher Bassett provides a number of services: a monthly computerized report of loss and claims experience for each municipality, regular meetings with municipalities to assist in safety and loss prevention activities, recommendations on improvements in procedures, operations and physical plants to reduce accidents, audits to measure the practice of risk management recommendations, daily contact as needed to asist municipalities in handlng claims, and close liaison with IRMA attorneys on all claims litigation.

After the agency began its operations, the usual shakedown process took place. IRMA found it necessary to amend the original by-laws 16 times during its first 12 months. Two key problems were identified and acted upon during the first year. The first was the need for an in-house professional risk manager; the second was the admission policy for new members.

The first chairman of IRMA, Jim Griesemer, city manager of Downers Grove, described the position to be filled: "The risk manager would be required, among other things, to walk on water." The person holding the position of risk manager would be expected to manage the pool's funds, advise each community on claims covered by their deductibles, supervise the claims adjusting services, and insure settlements of claims to the best advantage of the agency. The risk manager would also oversee litigation and a comprehensive loss-prevention program in each community, as well as develop a master program of risk management applicable to the entire agency. Any individual working with over 20 municipalities would also need great organization and communication skills and familiarity with the workings of local government. A complete knowledge of insurance would be mandatory.

During its first year of operation, the agency accepted eight new members and turned down two applicants. Based on the experiences of the program, municipalities considering non-conventional forms of insurance are advised to review their policies with their carriers to see that no penalty clauses or other legalities could prevent their timely entry into a different program.

IRMA chose not to admit the two municipalities on the basis of their high loss records. It is IRMA policy, however, to reconsider applications of municipalities previously turned down in anticipation of improved loss records.

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A $500 application fee is required which is applied to the cost of a professional review of the applicant's past insurance portfolio and record. Upon acceptance to IRMA, new members must also pay an initiation fee of .0175¢ per $100 revenue to defray the cost of the original study and establishment of the agency.

The reaction

'We discovered that local governments can work together and get benefits that save big dollars. This is the most significant intergovernmental activity in Illinois to date'

The overall reaction to the operations of IRMA to date have generally been excellent. "This is probably the most exciting thing I have been involved with as a professional in city management," stated Griesemer, chairman of IRMA during its inaugural year. "I feel a group of municipalities learned to work together in an area that touched the guts of their own local operations and fundamental governing issues. We discovered that local governments can work together and get benefits that save big dollars. This is the most significant intergovernmental activity in the State of Illinois to date."

The incoming chairman who will lead IRMA through its second year of evolution is James Turi, city manager of Rolling Meadows. Turi is looking forward to his year at the helm and anticipates a full agenda in IRMA's second year:

"We must more clearly define criteria for membership and continue our controlled growth of membership. Furthermore, we will have to zero in on loss prevention programs and allow our team of Ancel, Glink, Diamond & Murphy; Gallagher & Bassett; and the risk manager to lead us in this direction.

"... the scope of coverages must be evaluated. In other words, should the deductibles be expanded or reduced; should the limits of the pool be raised; are there other areas of risk that should be included or excluded?

"Finally, the incentive to increase or reduce contributions based on loss records remains to be ironed out. The formula will factor in loss records to the annual contribution. This will serve as an incentive for implementing the safety education and risk management programs being developed."

Other cooperative insurance pools and risk management organizations are being established by units of government throughout the nation. Although a relatively new and untried concept in 1976, intergovernmental cooperatives to self insure are gaining wide acceptance. IRMA receives numerous requests for information and application. To assist in answering general questions, the Illinois Department of Commerce and Community Affairs (DCCA) has developed a thorough workbook on risk management. It has also put together an excellent TV video program discussing the IRMA story. Both resources are available from the Chicago and Springfield offices of the DCCA.

Other efforts

IRMA is one special case of municipalities that are willing to risk time and money in an innovative and cooperative program. As IRMA's success shows, the benefits for the participating units of government both in organizational performance and dollar savings are sizable. Other concepts of pooling are being used or tested in Illinois. For example, the Illinois Municipal Treasurer's Investment Pool is allowing small units of governments to maximize interest on short-term surplus funds. Efforts at joint purchasing are saving administrative overhead and taking advantage of volume discounts. Auctions of surplus government equipment and testing of police and fire department candidates are also being pooled and providing economies to local governments.

All these efforts should be applauded as innovations in intergovernmental cooperation.

Steven E. Aavang is executive director of the DuPage Mayors and Managers Conference. He holds an M.A. in public administration from Northern Illinois University.

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