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High self-insured retentions, mutual insurers and the purchase of coverage for high-cost boilers and machinery are cornerstones of Salt River Project's property/casualty insurance program.

The company's insured property values exceed $4 billion, most of which is concentrated in turbines, generators, boilers and other machinery, said William R. Powell, SRP's manager of risk management.

"When you get into the utility business, both the risk and the values are in the electric generating stations," Mr. Powell said. "Everything else combined-including office buildings-doesn't even come halfway close to the values you have tied up in the plants."

SRP's property and boiler and machinery insurance premiums currently exceed $1 million annually. Hartford Steam Boiler Inspection & Insurance Co. provides SRP with a primary $150 million layer of all-risk property and boiler and machinery coverage subject to a $500,000 per occurrence deductible. The coverage is written under a three-year policy.

Chubb Corp. and Fireman's Fund Insurance Co., in a quota share arrangement, provide $50 million of coverage excess of $150 million, while Kemper Insurance Cos. provides a $100 million layer excess of $200 million.

In today's competitive market, it would be easy to consolidate the coverage, but SRP has been served well by those insurers for many years, noted Michael J. Marsolek, senior vp for Aon Risk Services Inc. of Southern California in Los Angeles.

The manuscript policy under Hartford Steam Boiler's three-year policy stipulates the amount of administrative overhead costs payable is based on a sliding scale that is set on the size of the claims. For example, if a loss is over $2 million, the administrative costs paid are equal to 3.5% of the loss.

The manuscript policy also includes a clause promising to return up to 7.5% of SRP's annual premium for good loss experience. The 7.5% is payable for a loss ratio of 5% or less. A loss ratio of 5% to 25% percent calls for a credit of 5%.

On the other hand, SRP risks paying a rate increase if it has significant losses. SRP has benefited from the arrangement, despite a recent large loss, Mr. Powell said.

For 1994 and 1995, Hartford Steam Boiler has returned $75,000 and $94,500, respectively.

"Some would say you should have got that in reduced premium to begin with," he said. "But I have gained what is more important."

Mr. Powell explained that he used the refunds to show the end users within SRP their payoff for practicing sound engineering, maintenance and property loss control.

When Hartford Steam Boiler refunded the premiums, Mr. Powell invited its representatives to Phoenix to hand the checks directly to the SRP senior managers responsible for overseeing the operation of the company's machinery. A photograph of the hand off has been featured in the company's newsletter with a story explaining how proper equipment maintenance and employee attitude help SRP win a return of its premium dollars.

"It reinforces that employees' good practices convert to money," Mr. Powell said. "That's a cornerstone feature of our property insurance program. It's designed to give credit where good loss experience has accrued."

The refunds have also added to Mr. Powell's stature within his company. The first year SRP received a check from Hartford Steam Boiler, Mr. Powell received a SRP recognition award for exceptional performance.

In late March, however, SRP experienced the loss of a transformer, valued at more than $1 million, at a coal-fired generating plant, one of the largest electric generating facilities west of the Mississippi, Mr. Powell said.

With his current policy ending June 15, the company may be looking at premium increases because of the loss. However, because of favorable market conditions SRP could end up with a program providing a premium credit for good loss experience without any penalties for poor loss experience, he explained.

Under the current policy, SRP would have received another $100,000 had it made it through the policy year without the transformer loss. Regardless, Mr. Powell said SRP still gained from the insurance arrangement because of its value in teaching the operations personnel about the benefits of loss prevention. The loss itself was unpredictable and unpreventable.

United States Aircraft Insurance Group writes hull and liability coverage for two SRP helicopters and one airplane with insured values ranging from $500,000 to $3.5 million.

SRP pays nearly $1.9 million for various other insurance coverages.

SRP participates in the utility industry rent-a-captive, Energy Insurance (Bermuda) Ltd., for $1 million excess of a $1 million self-insured retention for general and auto liability risks.

Associated Electric & Gas Insurance Services, a Bermuda-based excess and surplus lines mutual insurer, provides general and auto liability excess of the rent-a-captive, as well as primary employment practices liability, fiduciary liability for various joint-venture projects, and directors and officers liability.

AEGIS provides up to $25 million of coverage excess of SRP's retention on a claims-made basis.

Energy Insurance Mutual Ltd., a Tampa, Fla.-based utility industry mutual, provides a high-excess layer of liability insurance above AEGIS, following form. EIM writes $100 million excess of $25 million for general liability risks and $50 million excess of $25 million for D&O on a claims-made basis. "The beauty of that is you have following form coverage up to very high limits, which really is pretty convenient," Mr. Powell said. "You don't have any gaps or differences in coverage."

ACE Insurance Co. Ltd. provides an additional layer of high-excess general liability above EIM, Mr. Powell said.

SRP benefits from the continuity credits, premium refunds and policyholder distributions paid by the mutual insurers, Mr. Powell said. "Not just price, but the cover has been very broad and there is the opportunity to take part in the business affairs of the insurer," he said.

Mr. Powell sits on a loss control task force for AEGIS and a business affairs advisory committee for EIM.

"With commercial insurers you are not given, nor do they desire, that kind of involvement," he said.

SRP has been covered by mutual insurers since the mid-1980s, when liability insurance evaporated, said Michael P. Culshaw, SRP's supervisor of insurance services. Placing the coverage directly requires more scrutiny than placing it through a broker, he added.

"You can bet that if I'm an equity holder in the company and I get continuity credit based on my equity buildup in the surplus, I will take a little bit more active interest in that insurance operation, he said."

SRP does not purchase environmental impairment insurance, relying on risk control and its own funds.

For workers compensation, SRP self-insures the first $2 million per occurrence of its workers comp losses and buys excess workers comp coverage from National Union Fire Insurance Co. of Pittsburgh, Pa., an American International Group Inc. unit.

The aircraft, property and excess workers comp coverages are placed by Aon Risk Services Inc., while Sedgwick Group P.L.C. places SRP's coverage with ACE. SRP deals directly with AEGIS and EIM.