Managing Insurance Costs in Today's Marketplace, Part 2

Editor's Note: This is the second part in a two part article. To read part one, click here.

Direct claims costs are usually identified from details presented in clients' loss runs.

Costs such as medical expenses, indemnity costs, attorney fees, expert witnesses and adjusting fees can be separated and are included in the rating plan documents for retrospective, deductible and self-insurance plans.

Indirect claims costs can impact a contractor as much as the direct costs and in some cases more. These costs can add significant dollars to the cost of risk and need to be identified and recognized for risk management treatment when accidents occur.

Typical indirect costs include:

• Time lost from work by injured party
• Loss of full earning power
• Lost time of fellow workers filling in for injured worker
• Loss of efficiency due to disruption of schedule
• Damage to tools, machinery, property, etc.
• Cost of temporary or new employee
• Spoiled work
• Overhead cost while work was disrupted
• Failure to complete work
• Economic loss to injured worker's family
• Management time spent dealing with the injured worker, adjusters and attorneys

Studies conducted by the Construc­tion Industry Institute estimate indirect costs of worker's compensation claims as follows:

Recordable Incident - $1,000

Lost Work Day Case - $26,000

A Litigated Case - $100,000

These costs are not transferred to an insurance company but are absorbed into the operating costs of the construction firm. They can add up quickly and are, in many cases, invisible to the traditional worker's compensation cost analysis. Most contractors now agree that these costs can represent as much as three to five times the direct insured losses. A contractor with $1 million in worker's compensation claims could have as much as $3 to $5 million in indirect costs impacting the construction operations.

Specific risk management techniques that can be used with regard to indirect costs include the following:

1. Maintain a strong position for modi­fied duty and return to work.
2. Develop standards for accident and incident investigations.
3. Examine the cost containment and utilization review technologies of the insurance company for an important balance between care quality for the injured worker and cost manage­ment controls negotiated with providers. By treating each injured worker like an industrial athlete and returning him or her to work, the employer can avoid costly litigation and improve field production at the same time.
4. Evaluate the insurance company's performance in both occupational and disability management, compar­ing to national averages and specific historical models.
5. Utilize structured settlement options where possible and economical.
6. Evaluate the quality of the insurance company's adjusting staff from the perspective of workload, employee turnover and construction industry experience.
   

   Indicators of Workers' Compensation Fraud

   Conflicting history of accident (by claimant, doctor, hospital).	A claim filed while employee is on strike or just prior to strike.
   Late reported claims (over 30 days).	A claim filed after employee has been notified that he/she is going to be terminated or laid off.
   Unwitnessed accidents in general.	A claim filed after plant is closed down or just prior to plant closing down.
   Monday morning accidents (especially if claimant just returned from vacation).	Claimant is not home when called during the day.
   Friday evening accidents (may have occurred over the weekend).	The claimant is disabled longer than the nature of injury warrants.
   Claimant refuses to give a statement.	Anonymous letters received advising that the claimant is working.
   Claimant is injured on the first day or first week of employment.	Claimant has an attorney immediately following the accident.
   Claimant is difficult to contact by mail or telephone.	Injuries are of the subjectively diagnosed variety (soft tissue).
   Accident occurring (allegedly) on the last day of employment, especially with seasonal employment.	Minor incident results in extensive (exaggerated) personal injuries.

7. Consider developing project or location physician clinics and hospi­tals whereby the contractor's posi­tion on modified duty and return-to-­work programs have been effectively communicated throughout the system, creating incentives for the health providers to work as a critical member of the team in returning injured workers to the job.
8. Develop a complete list of fraud indicators with the insurance compa­ny adjusters to raise awareness on claims that might be fraudulent in nature. Review these indicators at the quarterly claims meetings when a particular incident warrants such investigation. (See Figure 1 for a list of typical fraud indicators for consid­eration.)
   

Collateral Requirements

Most cash flow insurance rating plans require some level of collateral in exchange for the credit risk and the surplus effects such plans have on the financial statements of insurers. Fre­quently, this collateral is made up of letters of credit, cash deposits or addi­tional premiums put aside in an invest­ment account for the benefit of the contractor. Over time, these forms of collateral begin to mount, creating financial statement concerns for the contractor with the bank.

Today's market has not relaxed its requirements for LOCs for collateral. It is important to closely track amounts from year-to-year and to audit the losses, payments and IBNR figures annually.

Several contractors have even gone as far as to establish captive or rent-a­-captive facilities to assume outstanding losses or old reserves, funding the requirement with discounted future premium payments. This method could have positive effects on earnings, espe­cially with the possibility of premium deductibility.

However, this technique will have only limited success unless contractors combine this financing tool with a detailed action plan for reducing and closing out claims. Many contractors have found it advantageous to retain an outside firm to focus on this area. The keys to success include the following:

• Management should understand that worker's compensation costs are variable and not fixed.
• Injured workers should have quick access to quality medical providers who are committed to the return-to­-work philosophy.
• Management should be creative in developing solutions and working with the providers, including incentives.

Figure 2 lists some general ideas for reducing costs beyond what insurers traditionally distribute.

Safety Management

Foregoing risk management practices, especially safety management, because of the availability of lower-cost insurance, places the contrac­tor at risk in areas not traditionally recognized or even insured. The insur­ance industry has never drafted a policy that insures every type of risk faced by a contractor. In this vein, risk manage­ment, including safety management, is not divisible from effective general management practices.

Well-run and profitable construction firms usually have a fairly effective safety management program. Effective management and leadership techniques are what really integrate risk and safety issues into a contractor's overall opera­tions. Performance benchmarking areas generally reveal that contractors with above-average net earnings have strong leadership skills. They typically embrace strategic planning seriously, market themselves effectively and integrate risk management into the operations of the firm.

Zero injury is directly related to highly profitable construction opera­tions. This is a cultural and philosophi­cal issue that cannot be delegated to a safety engineer from an insurance company or service provider. It's an internal challenge and needs to be driven from within. Starting at the top of the organization.

Cost Reduction Strategies for Contractors

Market insurance/risk manage­ment programs "intelligently." Use specifications and balance markets and time effectively.	Maintain historical updated claims reserves and large loss analysis.	Either hire a risk manager or outsource the function to a knowl­edgeable risk management consult­ant with experience in construction.
Use partnering as a process on all projects of size, lowering the overall risk cost.	Leverage services and purchasing power with single insurer.	Develop service requirements of agent/broker, claims, safety and insurance company personnel. Communicate with them frequently.
Negotiate loss financing and rating plans that strip away frictional costs of the traditional insurance system.	Audit outstanding claims reserves for reductions. There are lots of dollars hidden in those old claims.	Choose a knowledgeable agent/broker experienced in the construc­tion industry.
Conduct an annual Risk Assess­ment for identification of insur­ance cost redundancies and implement strategies.	Audit experience rating calculations and premium audits.	Don't rely on market conditions as a cost reduction-strategy. Everybody gets those "gimmies." Real competitors reduce real costs.
Understand the impact of rates and classifications on the experience rating process.	Calculate test rating modifier six months prior to renewal dates.

The following represent key management practices for safety management that have been identified by several construction organizations for effectiveness in zero-injury technologies:

• Adopt the mental game of zero­ injury technology. This starts with the chairman of the firm.
• Create an environment of owner­ship and empowerment among the workforce.
• Sell the idea that injuries are not acceptable.
• Understand that profits lost through worker's compensation or general liability claims are not covered by an insurance policy.
• Recognize that quality of effort is more important than time spent as zero-injury techniques are implemented throughout the construction process.
• Involve owners and subcontrac­tors as active participants in achieving zero-injury technology. This includes contract docu­ments, risk allocation and methods of insurance transfer utilized on projects.

Lastly, knowledge continues to be our most important asset as an industry, creating the basis of value, revenue and profit. A world driven by knowledge and information will require different types of organizations, with different types of workers distributing products and servic­es differently. With the supply of infor­mation available to us doubling every five years, risk management is maturing into a knowledge-based competitive tool. It's about information, breaking new ground, leaving behind outdated tools for new challenges, taking control while reaping the benefits of the system and the market conditions. Risk manage­ment is about creating new ideas to solve new problems.

Construction Business Owner, October 2006