Construction Case Study: Adverse Loss Ratio Impacts Bidding
A large general contractor in the Chicago area was coming off a couple bad workers’ compensation (WC) loss years that were predominately the result of two questionable claims. The insurance carrier had reserved these losses at “worse case” scenario, creating an adverse loss ratio. As a result, their Experience Modification Factor (EMR) exceeded 1.0, which prohibited them from bidding on various projects.
The contractor was looking for a workers’ compensation solution that would eliminate market cycles and allow them to better control costs by implementing a strong risk management program. As such, we introduced the client to RMA. This self-insured program allowed the company to take ownership of their insurance program, including the following services and support that they were looking for:
- Strong claims and safety advocacy support
- Claims payment authority – communication with the adjusters substantiating claim payments
- Reserve input – the ability to provide adjusters with information that directly impacts the claims reserve process
- Choice of attorney services – allowed the company to utilize their own attorney relationships
- Strong cash flow – the RMA is a “paid loss” program that allows you to hold claims reserves and make payments once the claims have been paid
- EMR flexibility – the RMA provided an EMR below 1.0, allowing the client to bid on preferred projects
- Consistent rates and program expenses – RMA has not increased their base rates for over 10 years
What are the takeaways?
You might be in a similar situation due to severe or questionable claims. It’s important to work with insurance brokers who understand not only the construction industry, but also your claims history. This way, the broker can help position your company in the best light to carriers. Also, make sure you:
1. Understand all your options – In the early 1980’s, 90 percent of the insurance dollars were spent in the traditional insurance marketplace. Today, less than half of the insurance dollars are spent there. It’s important to evaluate other solutions, such as higher deductibles, self-insurance programs, captives, risk retention groups…etc.
2. Effectively communicate your claims history – Work on a detailed claims summary with your insurance broker to help carriers better understand the issues at-hand and that the risk was much better than it appeared on paper.
3. Complete regular claim reviews – Undergo regular claim reviews with your broker to help mitigate loss on the old claims and control any new activity.
4. Establish a safety committee – Establish a safety committee made up of employees, management and your broker’s risk management department. By creating a safety committee that is backed by management and includes participants of all experience levels, you’ll receive proper input and have the ability to take action quickly. Trainings can be conducted on key exposure areas to eliminate potential losses.
What was the result?
This particular client became a member of the RMA program on June 30, 2009. At that time, the insurance market had become hard. There were only one or two standard market choices available. These markets were looking to charge $530,000 in premium. The cost of the RMA program in 2009 was $205,350 (including losses). Subsequently, the next four years have significantly reduced the client’s WC costs.
If they were to have maintained a guaranteed cost program in the standard marketplace over the past five years, the company would have paid $2,320,000 in premium (based on competitive market quotes). As a result of moving into the RMA, the client has paid $1,148,650 in actual WC costs.
The net effect is a WC cost savings of $1,171,350 or a 200% cost reduction in the span of five years.
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