Reference no: EM132556813

Case Study-Taunton College

Established in 1850, Taunton College is a private, not-for-profit college in a medium- sized metropolitan area. Taunton College attracts a very high-quality student body because of its world-renowned faculty, who are acknowledged experts in their respective fields. Two thousand undergraduate students and 500 full-time graduate students attend Taunton. Annual tuition averages $50,000 but the college grants significant tuition reductions through scholarships to deserving students. A $700 million endowment funds a large part of the college's expenses.

Taunton's tuition and fees grew faster than comparable institutions over the last five years. In response, the President of the college asked the administration to look at ways to cut the operating expenses. Among the many initiatives proposed, he asked Taunton's Risk Manager to assess a self-insurance plan for its Workers Compensation program.

Taunton employs 800 people in three main job categories. Three hundred work as faculty members, about one-third of who are part-time. Three hundred people work desk jobs in administrative services, mainly clerical workers and IT staff. Two hundred technical service workers work as police officers, nurses, groundskeepers, electricians, and carpenters.

Recently Taunton's built a state-of-the-art fitness center and strongly encourages its use by employees. Taunton grants employees time off during their normal workday to attend wellness classes, exercise programs, and organized intramural sports. The facility operates from 6:00 a.m. to midnight, seven days a week. Most employees take advantage of the services. As a result, Taunton College management believes that its employees are healthier than the average population.

Part One - Self-Insurance

State law allows organizations like Taunton to self-insure their workers compensation exposure. State law also requires that if an organization wants to self-insure worker's compensation, the organization must also maintain excess liability insurance for any claim over $100,000. The state assesses taxes and fees based a fixed percentage of paid claims. Taunton plans to outsource its administrative functions to a third-party administrator.

Question 1- Advantages and Disadvantages of Self-Insurance for Taunton

As the first step in the analysis, the Risk Manager asks you to:

(A) Identify the advantages and disadvantages of self-insurance and write brief descriptions how each applies to Taunton College.

(B) Overall, do the costs of self-insurance out-weigh the benefits for Taunton College, or vice-versa? Why?

Part Two - Retrospective Rating

As an alternative to Self-Insurance, the Risk Manager solicited bids for the Taunton College Workers Compensation insurance business.

The current insurance producer quoted guaranteed cost insurance at $1,350,000 for the year. The Risk Manager estimated the upcoming year's workers compensation claim costs would be $650,000. However, those results could move up or down significantly, depending on the risk control efforts and the extent of employee injuries suffered.

Taunton College received four retrospective rated insurance proposals for its workers compensation exposure. The details, all from different insurers, are summarized below:

The Risk Manager prepared the following table of the expected premium costs, at different levels of employee Worker's Compensation losses:

Question 2-Ranking Retrospective Rating Plans

The Risk Manager asks you to address the following questions:

(A) Assuming that losses will be $650,000 as expected, use the Risk Financing goal of minimizing the cost of risk to rank the 5 different proposals:

a. The 4 different retrospective rating proposals; and
b. The guaranteed cost insurance proposal;
in order from 1 to 5, with 1 being the most desirable, and 5 being the least desirable. Explain your rationale why these individual plans are desirable, or not desirable, from the perspective of minimizing the cost of risk.

(B) Which of the 5 plans would you recommend that Taunton consider, and why?

Part Three - Captive Insurance

The Risk Manager at Taunton College dreams a big dream that one day Taunton College will have its own captive insurance company. The main driving force behind this dream is that Taunton College would be in control of its insurance destiny.

The Risk Manager envisions the following plan:

(C) Taunton College establishes a single-parent captive insurance company and uses the captive to cover losses arising from its workers compensation loss exposures, up to a $2 million per occurrence.

(D) The insurance arrangement between Taunton College and the fronting company is an incurred loss retrospective rating plan with a loss limit of $100,000 per occurrence for its workers compensation loss exposures.

(E) Taunton College's captive insurance company then re-insures the fronting company on the same retrospectively rated basis. The captive insurer then purchases excess of loss reinsurance of $1,000,000 for any loss in excess of $1,000,000 per occurrence.

Question 3- Determining Net Loss Exposure Per Occurrence

A. How much potential loss would Taunton College retain per occurrence?
B. What is the captive insurer's net loss exposure per occurrence?
C. What is the maximum the captive's reinsurer would pay for any loss?

Attachment:- Case Study -Taunton College.rar