Internal Audit Report

Comprehensive Operational Audit
Risk Management Department


January 1, 2010 December 31, 2011 




Issue Date: May 15, 2012
Report No. 2012-07

Internal Audit Report
Risk Management Department
January 1, 2010  December 31, 2011

Table of Contents
Transmittal Letter ................................................................................................................................................................... 3 
Executive Summary............................................................................................................................................................... 4 
Background.............................................................................................................................................................................. 5 
Highlights and Accomplishments...................................................................................................................................... 7 
Audit Scope and Methodology............................................................................................................................................ 9 
Conclusion ............................................................................................................................................................................... 9 















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Internal Audit Report
Risk Management Department
January 1, 2010  December 31, 2011

Transmittal Letter


Audit Committee
Port of Seattle
Seattle, Washington

We have completed a comprehensive operational audit of the Risk Management Department.
We reviewed information relating to the Risk Management Department from January, 1 2010, through
December 31, 2011.
We conducted this performance audit in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on our
audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
We extend our appreciation to the Risk Management staff for their assistance and cooperation during
the audit.

Joyce Kirangi, CPA
Director, Internal Audit






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Internal Audit Report
Risk Management Department
January 1, 2010  December 31, 2011
Executive Summary
Audit Scope and Objectives The purpose of the audit was to determine whether management
has implemented adequate controls to ensure:
Policies and procedures are followed and kept current
Performance measures are tracked
Receipts are properly accounted for
We reviewed information for the period January, 1 2010, through December 31, 2011.
Background  The Risk Management Department provides many services and performs many tasks
for the benefit of the Port as a whole: 1) incident reporting, 2) claims management, 3) contractual risk
analysis, 4) risk financing, 5) insurance purchasing, 6) driver safety training, 7) enterprise risk
assessments and 8) special event management. The Department also has a role in self-funding for
employee health benefits, fleet management as it pertains to driver safety, contractual liability
management with the Central Procurement Office, construction safety and management of the
federally mandated drug testing requirements for commercial driver license holders (emphasis in
2012 is on the new hires for the rental car facility busing operations). Risk Management uses broker
intermediaries to purchase commercial insurance policies that pay for losses exceeding the selfinsured
retention of $1 million. Reported incidents number approximately 700 per year, with less than
one percent becoming claims.
Departments throughout the Port are responsible for all liability and property claim and litigation costs
not covered by property and general liability insurance up to the Port's $1 million self-insured
retention, including outside attorney services. Departments do not budget for these types of uncertain 
losses and related claims as they generally fall within the Port's self-insured retention (deductible).
However, claims and losses may exceed the available limits of coverage, may relate to events for
which there is no insurance available or where the Port chose not to purchase insurance.
There were 4,289 incidents for the five year period 2007-2011 in the incident-tracking database. The
following totals include Worker's Compensation incidents, which are not included in the scope of this
audit:
Year         Incidents 
2007        850 
2008        921 
2009        823 
2010        801 
2001        894 
Audit Result Summary The Risk Management Department has adequate controls to ensure policies
and procedures are followed and kept current, performance measures are tracked and receipts are
properly accounted for.

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Internal Audit Report
Risk Management Department
January 1, 2010  December 31, 2011
Background 
The Risk Management Department provides many services and performs many tasks for the benefit
of the Port of Seattle as a whole: 1) incident reporting, 2) claims management, 3) contractual risk
analysis, 4) risk financing, 5) insurance purchasing, 6) driver safety training, 7) enterprise risk
management assessments and 8) special event management. The Department also has a role in
self-funding for employee health benefits, fleet management as it pertains to driver safety, contractual
liability management with the Central Procurement Office, construction safety and managing the
federal mandated drug testing requirements for commercial driver license holders (emphasis in 2012
is on the new hires for the rental car facility busing operations). Risk Management uses broker
intermediaries to purchase commercial insurance policies that pay for losses exceeding the selfinsured
retention. The Risk Management Department uses industry claims management software to
track all reported incidents, adjust claims and monitor litigation.
The incidents in the table below include worker's compensation incidents, which are tracked in the
same database, but are not the responsibility of the Risk Management Department. Of the incidents
cited below, Risk Management is responsible for approximately 700 incidents annually.
Year           Incidents
2007           850
2008           921
2009           823
2010           801
2001           894
Total              4,289
Port departments are directly responsible for all liability and property claim and litigation costs not
covered by property and general liability exposures up to the Port's $1,000,000 self-insured retention.
These costs are borne by the business unit that manages the operation or the revenue center where
the liability arises. Departments do not budget for these losses, as they generally fall within the Port's
self-insured retention. However, claims may exceed the available limits of coverage, may relate to
events for which there is no insurance available or may be areas for which the Port chose not to
purchase insurance. The Port establishes reserves to cover potential claims costs.
The Port had an owner controlled insurance program from 2001 to 2008, to manage claims and
provide insurance coverage for the major capital program at the airport, which included the AOB,
CTE, Third Runway, STS Upgrade and several other projects. Although the program ended in
2008, the policies are still active to receive and respond to claims through 2016. This program will
generate refunds on Port collateral, premium refunds and interest earnings on collateral.




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Internal Audit Report
Risk Management Department
January 1, 2010  December 31, 2011
The following tables depict the top ten incident locations and the top six incident types relative to
incidents that involve property damage and bodily injury.
Top 8 Incident Locations                 2007   2008   2009   2010   2011   Total
Escalator                             113    131    126    171    199     740
Parking Garage                        58    53    52    53    55     271
AOA/Ramp                     28   71   30   34   50    213
Parking Lot                             31    39    31    36    44     181
Street                                37    49    27    35    28     176
Main Terminal                        30    33    37    30    26    156
Dock                           12    27    18    20    22     99
Baggage Claim                        25    28    28    10    14    105
Grand Total                          334   431   349   389   438    1941
Source: RiskMaster  incident tracking and claims management database
Top 6 Incident Types                   2007   2008  2009   2010  2011   Total
General Liability Aviation Bodily Injury           351   322    310   353    347    1683
Vehicle Incident - First Party Only               19    49     44    47     73     232
General Liability Aviation Property              43    77     66    35     63     284
Port Property Loss Real Estate                 1     3     29    27     48     108
Port Property Loss Aviation                  34    50     24    33     45     186
Vehicle Incident                          62    77     60    63     39     301
Grand Total                          510   578    533   558    615    2794
Source: RiskMaster  incident tracking and claims management database
Financial Highlights
Reserves declined significantly in 2011, due to settlement of litigated claims.
Actual    Actual    Budget
Insurance Premiums
2010    2011    2012
Property Insurance Premiums               1,180,332 1,216,743 1,400,000
Liability Insurance Premiums                  670,000   692,000   725,000
Claims and Litigation Reserves              10,838,315 2,400,000 2,600,000
Driver Program Liability Costs                   13,300    25,000    50,000
Workers Compensation Self Insured Reserves     1,333,000 1,200,000 1,400,000
Driver Program Physical Damage Costs           31,300   20,000   35,000
Source: 2012 Budget Summary



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Internal Audit Report
Risk Management Department
January 1, 2010  December 31, 2011

2010    2011    2011
DESCRIPTION            ACTUAL  ACTUAL  BUDGET
OPERATING REVENUE                    0      0      0 
OPERATING EXPENSE
SALARIES & BENEFITS                  547,697   522,392   551,050 
OTHER OPERATING AND MAINTENANCE        87,659   22,139   33,268
TOTAL OPERATING & MAINTENANCE EXPENSE   635,356   544,531   584,318 
Source: Responsibility Reports
Highlights and Accomplishments 
Claims Review
In May 2010, a claims officer from an insurance carrier independently reviewed the Port's claims
management program. This review encompassed handling procedures and a sample of 33 claims,
which represented a cross section of losses spanning several operations, including those at the
airport, seaport, cruise and moorage terminals, as well as vehicular accidents and situations giving
rise to employment related claims. The conclusion was that the overall management of the process
was very professional, from the investigation to liability assessment to evaluation of damages to
negotiation of settlements.
Claims Management
The claims program generates approximately $1,000,000 in reserves and self-insured retentions
each year, as well as payments of approximately $300,000 per year to claimants and service
providers. The Risk Management Department is responsible for the management and resolution of
approximately 700 events per year, which involve a wide variety of property and liability. The
coverage, exclusions, self-insured retentions and deductibles vary widely with retentions up to
$1,000,000 and policy limits up to $500,000,000.
Enterprise Risk Management
Enterprise Risk Management had been discussed for a number of years at the Port. In 2010 a pilot
study was done for Harbor Services. The Port used a consulting firm to assist the Port and educate
management on a risk assessment framework. In 2011, another ERM project was conducted,
which involved the ICT Corporate Services Department. This latter study was performed without
consultants. Results of both assessments were presented to the Audit Committee.
Liability and Property Insurance Broker Selection
A five-year contract with a national brokerage firm was signed in May 2011, after a competitive
process and a team evaluation of the proposal, to assist the Port with its liability risk management
(including claims and procurement of insurance). A three-year contract was signed in March 2012,
following a separate competitive process, to select a broker to assist the Port with the purchase of
its property insurance, equipment breakdown inspections and property claims management.
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Internal Audit Report
Risk Management Department
January 1, 2010  December 31, 2011
Driver Safety
Risk Management oversees the driver safety program, which covers all Port drivers as well as
specialized drivers that require commercial driver licenses. This program covers the Port's selfinsured
auto program, the management of first-party and third-party auto claims, recovery of
damages from liable third parties, maintaining a list of employees eligible to drive, driver training
and communication of safety performance criteria through the Port's Health and Safety Program.
Since the Port began its self-insurance program in 2003, savings are approximately over $3.5
million dollars, with an additional amount of over $150,000 collected from the parties responsible for 
physical damages to Port-owned vehicles.
Self-Funded Employee Benefit Programs
In 2009, Risk Management initiated the Port's research into the merits of self-funding medical and
dental benefits for the Port. Self-funding provides more control over benefits offered and cost savings
of profit that would otherwise go to the insurance company. Transition to the self-funded program
began in 2010, with 2011 the first year of implementation, covering about 950 employees. Total
incurred costs for 2011 medical claims were $10.3 million ($1.1 million below the budgeted costs).
Total incurred costs for 2011 dental claims were $1.3 million ($190,000 below the budgeted costs.
The run of claims from the 2010 (and prior) fully insured plans with Premera will result in the Port
receiving an estimated $2 million refund of its Premium Stabilization Reserve in 2012, after the
reserve is closed.
Cost of Risk - Risk and Insurance Management Society (RIMS) Benchmark Survey
$50.00
$45.00        Port of Seattle - Cost of Risk Per
$40.00                $1000/Revenue
$35.00
Port Cost of Risk per $1000 of Revenue
$30.00
Risk and Insurance Management
$25.00
$20.00
$15.00
$10.00
$5.00
$-
19961997199819992000200120022003200420052006200720082009201020112012
Est
Note-The Port's Cost of Risk is in line with industry standards.
Review of Contracts
Risk Management reviews over one hundred contracts annually, which include leases, MOAs,
interlocal agreements, personal and professional service agreements and construction contracts. The
department's review ensures that insurance and indemnity requirements are adequate.  Risk
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Internal Audit Report
Risk Management Department
January 1, 2010  December 31, 2011
Management participated in the CPO-led study team in 2011 (Service Agreement Advisory
Committee), which reviewed CPO-1 and recommended changes to facilitate utilization and execution
of this policy for service agreements.
Audit Scope and Methodology
We reviewed information for the period 2010-2011 and analyzed reported incidents for a five-year
period (2007-2011). We utilized a risk-based audit approach, from planning to testing. We gathered
information through interviews, observations and analytical reviews, in order to obtain a complete
understanding of the operations and responsibilities of the Risk Management Department.
We applied detailed audit procedures to areas with the highest likelihood of significant negative
impact as follows:
We reviewed Policy EX-7, which guides incident reporting, and Policy EX-14, which guides
driver safety.
o We determined whether the policies had been reviewed and updated, as necessary.
We reviewed the performance measures used by the department to determine whether
appropriate and reasonable.
o We compared performance measures to industry standards, to determine whether
comparable.
o We determined whether performance measures were related to goals and objectives.
We identified receipts flowing directly into the Risk Management Department and determined
whether properly accounted for.
o We determined whether receipts had been deposited timely
o We determined whether receipts had been properly recorded
Conclusion
The Risk Management Department has adequate controls to ensure policies and procedures are
followed and kept current, performance measures are tracked and receipts are properly accounted
for.





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