Gardena Puts Insurance Matters Into Own Hands : Government: In an effort to protect itself from liability, the city withdraws from pool and becomes the first in the country to sell policies to other cities.

Fearing that it would be saddled by huge insurance payouts, Gardena has taken the unprecedented step of withdrawing from a municipal insurance pool to set up its own company, which could raise revenues for the city.

Three weeks ago, Gardena became the first city in the country to own an insurance company. Municipal Mutual Insurance Co. will sell its first liability policy to the city itself on Tuesday.

Gardena’s move goes beyond self-insurance or municipal insurance pools, which were created in the mid-1980s when commercial insurance carriers stopped selling liability insurance to cities.

Not only will the city be a policyholder, it will sell insurance to other cities at rates it says will be competitive with the insurance pools.

No other city in the country has taken such a move, according to the Public Risk Management Assn., a national trade group, and some experts have doubts that Gardena will be successful. Attracting policyholders, they say, will be a challenge since the premiums of municipal insurance pools have been cheaper than commercial carriers.

Kenneth W. Landau, Gardena city manager and president of the company, predicted that Gardena would make money from the company, but he could not say how much until he sees how many cities sign on. A marketing study has shown that the company would be viable, he said. By buying insurance from its own company, Gardena would not have to pay the liabilities of other cities, which can occur in an insurance pool, Landau said.

“It’s really easy for me to go to the City Council and say we have to pay $1 million because we had a wrongful-death shooting,” Landau said. “It’s very difficult for me to go to the City Council and say the city of ‘X’ had a wrongful-death shooting, and it penetrated their self-insurance retention, so consequently we have to pay another percentage for them.”

Landau touts MMIC as a risk transfer company and points out that, unlike pools, MMIC and other commercial insurance companies cannot ask their policyholders to pay costs above the premium.

Gardena’s company plans to sell liability insurance to medium-sized cities throughout the state. Since MMIC is a mutual insurance company, its policyholders will become part-owners eligible to receive dividends.

To start MMIC, Gardena was required to raise $10 million through bonds as a guarantee that funds would be available to pay claims, said James Holmes, an attorney with the state Department of Insurance.

“The department was able to satisfy itself that the company did have a lawful plan of operation and a reasonable probability for success,” Holmes said. “But the company must still bear the burden of convincing cities that its prices and its coverage are superior to that provided by the pools which the company believes are its principal competitors.”

Gardena plans to pay off the bond before subsequent MMIC policyholders receive dividends.

As a policyholder, Gardena will also receive higher dividends than other policyholders--a fact that Landau believes will not deter cities from coming aboard.

“Everybody recognizes that Gardena will get more than other cities because it did go out and do the capitalization,” Landau said.

Owning an insurance company is not the first innovative project for Gardena. Last January, it became the first city in the state to establish a home buyers loan assistance program for its residents.

Gardena helped enact legislation that allowed it to issue bonds with the proceeds going to home loans for middle- and upper-middle income people.

But critics do not think Gardena’s insurance company will be as popular as its home loan program.

The city’s main competitors, insurance pools, have had a stronghold in California since the mid-1980s when commercial insurance companies stopped selling liability insurance to cities across the country.

Eighty-five percent of all California cities belong to the 132 pools in the state.

Landau contends that most of the states’ pools are poorly managed.

“Pools are totally unregulated and the deposit premiums are not based on sound actuarial studies,” Landau said.

Although risk managers agree that some pools are poorly managed, no pool in the state has ever declared insolvency, according to Greg Trout, accreditation consultant for the California Assn. of Joint Powers Authorities.

The association began accrediting pools in 1989 to preempt state regulation.

Though MMIC will incur greater overhead costs due to broker commissions and state taxes than pools, Landau says the company can compete. The company is expecting to write $5 million in premiums by the end of the year and $50 million in five years, he said.

Nevertheless, critics are skeptical about whether Gardena can pull it off.

“For MMIC to write $50 million in five years, it would have to sign up a third of the cities in the state,” said Gordon Davis, executive director of Independent Cities Risk Management Authority, a Los Angeles-area pool composed of 30 cities.

Still, municipal risk managers like James F. Patricola of Burbank see Gardena’s company as an alternative worth considering. Burbank belongs to ACCEL, the same pool that Gardena left in June, 1992.

“We want to to see how (Gardena’s company) plays out and what the coverage will be and what they will charge for coverage,” Patricola said, adding that the insurance pool Burbank belongs to has been “excellent--knock wood.”