June 30,1996
(Amounts in thousands unless otherwise stated)

Note 16

RISK MANAGEMENT

The risk financing and insurance program of the State is managed by the State Insurance Purchasing Board. The Board is responsible mainly for determining the method by which the State shall insure itself against losses by the purchase of insurance to obtain the broadest coverage at the most reasonable cost, determining whether deductible provisions should be included in the insurance contract, and whenever appropriate determining whether the State shall act as self-insurer. The schedule below lists the risks of loss to which the State is exposed and the ways in which the State finances those risks.

Regarding liability risk, the State is generally immune from liability due to having sovereign immunity. This means that the State cannot be sued for liability without its permission. For this reason, the State is self-insured for general liability risk. For other liability risks, the State purchases commercial insurance only if the State can be held liable under a particular statute (e.g. per statute the State can be held liable for injuries suffered by a person on a defective State highway), or if it is required by a contract. When purchasing commercial insurance, the State may retain some of the risk by assuming a deductible or self-insured retention amount in the insurance policy. This amount varies greatly because the State carries a large number of insurance policies covering various liability risks. The highest amount is a $25 million self-insured retention carried in a railroad liability policy.

Regarding risk of, theft of, or damage to assets (particularly in the automobile fleet), the State insures only leased cars and vehicles valued at more than $100 thousand.

Most State employees and retirees participate in four health plans. For one of these plans, the State is self-insured. This plan is administered by a vendor that is responsible for the processing and payment of claims. The State is responsible for making monthly contributions to the plan administrator to pay for claims processed in the following month. At the end of the fiscal year, the State determines whether total incurred claims (including incurred but not reported claims) paid by the plan administrator meet a contractual target. If total incurred claims are more than 103% of the target, the State would share the risk equally with the plan administrator. If total incurred claims are less than 97% of the target, the State would share the savings equally with the plan administrator. If total incurred claims fall between 97% and 103% of the target, the State would assume the risk or retain the savings entirely. As of June 30, 1996, total incurred claims paid by the plan administrator met the contractual target (i.e., the State entirely assumed the risk or retained the savings provided by the plans). Also, total incurred claims paid by the plan exceeded contributions made to the plan by $26.3 million.

The State records its risk management activities in the General fund, except for activities related to the medical malpractice risk which are recorded in the University Hospital fund. At year end, a liability for unpaid claims is recorded in each fund when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. The liability includes an amount for claims that have been incurred but not reported. The portion of the General fund liability considered to be long-term is recorded in the General Long-Term Debt account group. Changes in the claims liability accounts during the last two fiscal years were as follows: