How to Manage Soaring Insurance Rates

By John L. Cramer, AAI

Contractors throughout the country are experiencing significant increases on all lines of commercial property and casualty insurance policies. Workers' Compensation, General Liability, Commercial Auto, Equipment, Umbrella, Property and Builders Risk insurance are increasing an average of 30 to 50 percent according to numerous industry organizations and insurance companies. Masonry contractors are experiencing increases well above 30 percent in most states.

The driving force for these significant increases is the result of many factors, including a poorly performing stock market, significant increases in jury awards, increased cost of reinsurance for insurance companies, increased unemployment and escalating medical costs. In addition to these factors, most insurance companies are substantially increasing reserves on existing claims. Reserves are money set aside based on a prediction of the ultimate future costs on existing claims. Unfortunately, most insurance companies have grossly underestimated future costs.

The September 11th attacks strained the already poor operating results of the insurance industry. This event, while devastating, is not the sole cause of the hard market but was more of a catalyzing event that prompted the insurance industry to respond cohesively to declining results and a need to improve basic underwriting profitability.

Fiscal Year 2001 has proven to be the end of the "soft market" cycle that began in 1994. Insurance companies were able to take advantage of high returns on investments to offset losses on underwriting results (premiums vs. losses). During the seven-year period of the soft market, competitive pressures and desire to increase market share drove the insurance industry to a "cash flow" mentality of underwriting. Investment income was able to offset unreasonably competitive pricing and inadequate rate structures.

This situation continued to snowball until this past year. In many cases, contracting companies were paying lower rates in 2001 than they paid in 1994. Once the stock market and investment income came to a screeching halt, the insurance industry quickly realized that without sound underwriting and adequate pricing, survival for many would be impossible.

Workers' Compensation is clearly on the radar screen as the next looming crisis. Insurance companies are averaging increases in excess of 32 percent on most Workers' Compensation policies, and still feel this is not adequate. Underwriting appetites for construction risks, especially high hazard construction risks, result in even greater increases for certain classes of business.

Mason contractors are definitely considered a higher than average risk. It is worthwhile to note that one of the largest construction insurance companies in the United States has a countrywide prohibition on insuring masonry companies. Concerns for the frequency and severity of loss that masons are exposed to, and the perception of inadequate pricing, drive this "fear" of providing Workers' Compensation coverage for masons.

There are definitive measures that mason contractors should be taking in order to protect their ability to obtain coverage and keep their rate structure competitive with rivals operating in their geographic area.

Contractors should place emphasis on safety and loss prevention in a constant and consistent manner. Underwriters will continue to evaluate the safety program and loss prevention measures every contractor undertakes. A comprehensive safety program, fully supported, monitored and enforced by the management of a company, is proven to have positive results.

Emphasizing the involvement and instituting an incentive program for field superintendents to maintain a safe work place is critical. Superintendents who are competent in all aspects of safety, especially fall protection, personal protective equipment, scaffolding and power lift truck operation, have proven to be invaluable in preventing losses. Requiring Supervisors to be held accountable for accidents through an incentive program, such as a Safety Bonus, is a good start to developing a "Safety Mentality" that will carry through to each worker on the job.

Often the little things cause the biggest losses. Constant and consistent attention to items, such as the wearing of hard hats, maintaining falling object hazard zones, proper scaffold erection and maintenance, and proper fork lift operation, will pay off not only in reducing injury and losses, and fewer and lesser OSHA fines, but preferred premium rates as well.

Requiring field Superintendents to write detailed reviews of all accidents and suggest measures to prevent them from reoccurring is an excellent tool. Hold weekly "tailgate" safety meetings that review key issues such as fall protection, GFCI and electrical exposures, eye protection, hard hats, proper operation of saws, lifting techniques, etc.

Remember to carefully screen and monitor the Motor Vehicle records of your drivers. There should be no tolerance for unacceptable drivers operating company vehicles.

Do you have a drug-free workplace? Estimates vary greatly, but I think everyone agrees that drugs and alcohol should not be tolerated in the workplace and that a testing program is a necessity in all of our companies.

Higher Deductibles

Now is the time to consider higher deductibles on your property damage claims. Review your current schedule of autos and equipment and review claims to your own property over the last three or four years. If you currently are carrying $250 or $500 deductibles, consider how much it would have cost you additional if you would have had a $1,000 or $5,000 deductible versus premium savings.

In most cases you should be self-insuring small tools, equipment, etc. Ask your current agent to price various options and high deductibles. Insurance companies rely heavily on the concept that "Frequency of losses result in severity." Eliminating small nuisance claims makes you much more attractive.

Pay Small "Medical Only" Claims

In most states, paying small "medical only" claims on your Workers' Compensation is legal. You should still report the claim to your carrier, but, in most instances, unless you attach a bill from the medical provider, the carrier will maintain a copy of the report and only refer to it later if the claim develops into something significant. Talk to your insurance representative about paying small, medical only claims under $500 that do not involve any lost time from work. These are the typical cuts and scratches that require a quick trip to the local "doc in a box." This practice can also lower your Experience Modification Factor and make you more attractive to insurance companies that are cautious of any insured with a frequency of small claims.

Choose Carefully

It is more important than ever to carefully select the agent/broker that you work with to choose the right insurance carrier for your company. Start the process early. Begin work on your annual renewal 90 to 120 days prior to renewal. Choose an agent who is familiar with insuring contractors, and ask for references.

The same goes with the insurance company. Find a carrier that has a substantial amount of contracting already on the books and preferably a company that provides full Loss Prevention, Claims and Audit services. Make sure you carefully check on the ratings and financial solvency of the carrier.

You are looking for an insurance agent and company with which you can build a long-term, stable relationship. Hopefully, if and when that catastrophic loss occurs, your long-term relationship will allow the agent and the underwriter to carry you through your next renewal without hitting you with a huge increase.

By the way, once you hire the agent who best represents you, follow his or her advice and do not shop your account every year. The commercial underwriting field is relatively close knit, and most underwriters don't give their best effort on a "shopper."

In summary, it is time to tighten up, revive emphasis on safety programs, perform daily inspections and safety checklists, and manage your claims as tightly as possible. In the same manner that you work with a general contractor, architect or owner, put your best foot forward to the insurance company. It may take up to three years, but the longer you wait to start, the greater the increases you will experience. Just like your safety program, constant and consistence effort will pay off in the form of significantly lower increases on the premiums you will have to pay.