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Salt River Project managers are trimming operating costs and adding new revenue-generating services to give the company a competitive edge as deregulation of the utility industry unfolds.
Deregulation in Arizona will begin in 1999, and most of SRP's customers will be able to choose among various utility providers by 2003.
Deregulation means that SRP will operate in an environment where only the fit and efficient are likely to survive. It also means the company's risk characteristics are changing and demand different solutions, according to William R. Powell, manager of SRP's risk management department.
"Monopolies aren't what they used to be," reads a saying tacked up in an SRP risk management conference room.
As part of companywide efforts to trim unnecessary expenses, the risk management department has reviewed its own operations and costs. That review led to a doubling of the company's property and liability retentions over the past few years.
The company now retains $2 million per occurrence for general and auto liability risks, up from $1 million, and its basic property retention has increased to $500,000 from $250,000 per occurrence.
Salt River Project left a $1 million retention for high-value equipment, such as turbines, intact. "When there is a loss, it tends to make that machinery look like spaghetti," Mr. Powell said.
Increased emphasis on risk control practices and a detailed knowledge of the company's cost of risk allowed SRP to comfortably increase the retentions.
SRP also will encounter new risks as it develops new operating units to generate revenue, Mr. Powell pointed out.
For example, later this year SRP plans to launch a for-profit subsidiary that will sell electricity on the open market.
To both deal with the new risks and give the company greater risk financing flexibility, the risk management department conducted a captive feasibility study in early 1996.
That led SRP in the fall of 1996 to begin using a rent-a-captive: Energy Insurance (Bermuda) Ltd., a wholly owned subsidiary of Tampa, Fla.-based Energy Insurance Mutual Ltd.
SRP has been a member of EIM since 1986, and Mr. Powell serves on an advisory committee, so it made more sense to use the rent-a-captive rather than incur the start-up costs and administrative time required to form its own facility, he said.
"The captive is really about the future," Mr. Powell said. "There is enormous change going on, and we are getting into areas that are much different for our business. I have to say, it's probably uncharacteristic for a governmental entity like us to have a rent-a-captive. But it's all with an eye to the future, not to meet an immediate need."
Initial capital for the captive came entirely from the premium savings gained by increasing self-insured retentions, credits for good loss experience from SRP's insurers and taking advantage of the soft market while maintaining strict risk control practices, Mr. Powell said.
The captive currently is used to absorb a $1 million excess of $1 million buffer layer for SRP's general and auto liability program.
Eventually, the captive could allow the risk management department to provide other SRP units with unique coverage, Mr. Powell said.
For example, the company sustains a steady and predictable level of storm damage to its electricity transmission and distribution system. The damage currently is treated as a business expense.
But through its captive, the risk management department could provide insurance for those losses to the company's Power, Construction and Engineering Services unit. That would allow that division to stabilize its budget, Mr. Powell said.
"Ultimately, taken to its very extreme, we could be an insur-ance/risk management entity," Mr. Powell said. "The captive has helped us think about how we might run the risk management department to be a profit center.'