best practice suggestions for 2012 - Kraus

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PRESENTOR
Patrick D. Kennedy, Vice President
Kraus-Anderson Insurance
| [email protected] | O: 952.707.8236
| http://www.linkedin.com/in/patrickdkennedy
Presentation available at www.kainsurance.com
REDUCE YOUR COST OF RISK
STRATEGIES FOR SHORT & LONG TERM SAVINGS
ON CORPORATE INSURANCE.
PROPERTY & CASUALTY - MARKET TREND.
INSURANCE - - A CORPORATE ASSET?
COST OF RISK VS. COST OF INSURANCE.
CONTRUCTION RISK MANAGEMENT BEST PRACTICE SUGGESTIONS FOR 2012
PROPERTY & CASUALTY INDUSTRY
Carnac the Magnificent says . . . . .
First Half 2011 US CAT Losses Already Exceed Losses from All of 2010.
Even Modest Hurricane Losses Will Make 2011 Among the Most
Expensive Ever for CATs
Insurance Information Institute
August, 2011
- - Ratings company A.M. Best put the pre-tax tally from
catastrophes through the first nine months of 2011 at
$38.6 billion in the U.S. alone. That figure doesn't include
still mounting losses from the record- breaking
earthquake in Japan and massive flooding in Thailand.
12/06/2011; Dow Jones News Service
Number of Federal Disaster Declarations,
1953-2011*
90
81
75
63
59
69
45
45
49
44
32
36
32
43
45
38
11
31
34
24
21
15
23
22
25
27
28
23
38
30
29
17
17
19
11
11
12
12
7
7
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11*
0
13
17
18
16
16
30
22
20
25
25
40
10
42
48
46
46
50
20
50
60
48
52
70
56
80
65
90
A new record set in 2011 with 86
declarations through Sept. 30.
It is no wonder that FEMA is broke!
The average number of
declarations per year is
34 from 1953-2010,
though that few
haven’t been recorded
since 1995.
75
100
*Through October 31, 2011.
Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ;
Insurance Information Institute.
Top 12 Most Costly Disasters
in U.S. History
(Insured Losses, 2010 Dollars, $ Billions)
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Taken as a single event, the 2011
Spring tornado season would
become the 5th costliest event in
US insurance history
$45.8
$22.6 $23.1
$17.5
$6.3
$6.7
Jeanne Frances Rita
(2004) (2004) (2005)
Hugo
(1989)
$4.3
$5.3
$8.2
$8.6
Ivan
(2004)
Charley
(2004)
$14.0
$11.5 $12.8
Wilma
(2005)
Ike
Spring Northridge Andrew 9/11 Attack Katrina
(2008) Tornadoes* (1994) (1992) (2001) (2005)
(2011)
*Losses will actually be broken down into several “events” as determined by PCS.
Sources: PCS; Insurance Information Institute inflation adjustments.
5
PROPERTY & CASUALTY INDUSTRY
Carnac the Magnificent says . . . . .
- - Travelers Chief Executive Jay Fishman, “said his company had
increased prices for business-insurance clients by 5.2% in October
and 5.8% in November, the largest rates increase in several years.”
12/06/2011; Dow Jones News Service
- - S&P also called the workers comp industry’s track record of
underwriting results “dismal,” with only three years of underwriting
profits being earned during the past two decades. “Although many
property/casualty insurers, especially those writing workers
compensation, rely on investment incomes to offset underwriting
losses, current historically low investment yields could also hinder
such dependence going forward,” S&P said.
1/23/2012; Standard & Poor’s Corporation Report.
PROPERTY & CASUALTY INDUSTRY
Carnac the Magnificent says . . . . .
William R Berkley, CEO Berkley Companies
. . . . “Two and a half years ago, I thought the cycle
was going to change because I expected AIG not to
get the degree of help from the government that it
did. I was incorrect. The government, as we all
know, effectively bailed out AIG, which delayed the
inevitable.”
“Berkley says the assistance allowed AIG to cut
prices, and it ‘held the market in check,’ preventing
widespread rate increases.”
NU Online News Service, December 7th 2011
PROPERTY & CASUALTY INDUSTRY
Carnac . . . Please Translate!
What does all of this mean to me?
Industry-wide Rate increases for first time in 7 years.
Building/Property Rates are leading the way.
Market trend will last 2 Years - minimum.
Standard Market buyers: revise your composite
rate / unit cost pricing renewal expectations.
Standard Market buyers: conduct early pre-renewal
meetings, discuss what renewal strategy changes
should take place because of this market change.
PROPERTY & CASUALTY INDUSTRY
Carnac . . . Please Translate!
What does all of this mean to me?
Consider Risk Financing Alternatives
- Higher Deductibles / Retentions.
- Loss Sensitive Plans.
- Self-Insurance.
- Captives
ADDITIONAL STRATEGIES:
- Negotiate to extend current policies at current
rates in order to accomplish a Renewal Date change.
- Consider changing your Anniversary Date to a less
popular time (ie., 3/31, 6/30, 9/30).
- Identify a Risk Control Action that you can specifically
‘monetize’ as a direct savings in your upcoming renewal.
INSURANCE IS AN ASSET,
NOT A CERTIFICATE OF ACHIEVEMENT!
Insurance Policies - - acquired and then put away.
However, when Loss occurs, recovery of the
‘Insurance Asset’ immediately becomes all too real.
FUNDEMENTALS OF INSURANCE AS AN ASSET
• Document Retention Policy
• Track / Retain “Additional Insured” Endorsements.
Why? Because they are one of your Insurance Assets.
• INSURANCE TEAM - Important to Work Together as Allies.
• Communicate, Communicate, Communicate . . . . .
INSURANCE IS AN ASSET,
NOT A CERTIFICATE OF ACHIEVEMENT!
INSURANCE TEAM
Focus on Insurance Program Fundamentals
- Catastrophe Protection.
- Loss Prevention.
- Claims Management.
- Benchmarking & Record Keeping.
- Contract Compliance.
- Bottom-line Price.
and
Communicate, Communicate, Communicate . . . .
INSURANCE IS AN ASSET,
NOT A CERTIFICATE OF ACHIEVEMENT!
TOTAL COST OF RISK
CAN YOUR INSURANCE TEAM ANSWER
THE FOLLOWIG RISK COST QUESTIONS?
What are our significant risk cost drivers?
What is our organization’s Annual Cost of Risk?
What direction is it headed?
INSURANCE IS AN ASSET,
NOT A CERTIFICATE OF ACHIEVEMENT!
TOTAL COST OF RISK
What are significant risk cost drivers?
Common categories are:
1. Retained (Uninsured) Losses
2. Transfer (Insurance) Costs
3. Administrative (Labor) Costs
4. Risk Control Costs
INSURANCE IS AN ASSET,
NOT A CERTIFICATE OF ACHIEVEMENT!
TOTAL COST OF RISK
Driver #1) RETAINED (UNINSURED) LOSSES
“Cost of accidental losses not reimbursed by insurance or other outside
sources”.
1. ACTIVE RETENTION; such as Deductibles, SelfInsured Retentions or conscious noninsurance.
2. PASSIVE RETENTION; unplanned acceptance of
losses because of failure to act, forgetting to act or
failure to identify loss exposure.
INSURANCE IS AN ASSET,
NOT A CERTIFICATE OF ACHIEVEMENT!
TOTAL COST OF RISK
Driver #2) TRANSFER COSTS
1. Insurance Premiums
2. Noninsurance Indemnity or outside sources to fund losses.
3. Loss Funding.
4. Agent/Broker Remuneration, if outside premiums.
5. Broker Fees for (a) safety services, (b) claims
administration, (c) consulting/training
INSURANCE IS AN ASSET,
NOT A CERTIFICATE OF ACHIEVEMENT!
TOTAL COST OF RISK
Driver #3) CLAIMS ADMINISTRATION EXPENSES
Claim expenses for losses not included in the Insurance Premiums.
1. Third Party claims administrator .
2. Public Adjuster or Claim Consultant.
3. Salary burden of in-house claims administration.
INSURANCE IS AN ASSET,
NOT A CERTIFICATE OF ACHIEVEMENT!
TOTAL COST OF RISK
Driver #4) RISK CONTROL COSTS
“The costs associated with the prevention or reduction of
accidental losses.”
Money spent on Risk Control can
greatly influence the ultimate cost of
(a) Retained Losses,
(b) Transfer Costs, and
(c) Claims Administration.
INSURANCE IS AN ASSET,
NOT A CERTIFICATE OF ACHIEVEMENT!
TOTAL COST OF RISK
CALCULATING THE COST OF RISK
Retained Losses
Transfer Costs
Admin Costs
Risk Control
Totals
WC
Liability
Property
Professional
Total
$14.3
$1.8
$0.9
$0.6
$17.6
$1.6
$3.9
$0.3
$0.1
$5.9
$0.1
$1.1
$0.0
$0.2
$1.4
$0.3
$0.6
$0.0
$0.0
$0.9
$16.3
$7.4
$1.2
$0.9
$25.8
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
Treat your Insurance / Risk Management Program
as an Corporate Asset.
Create a Risk Management TEAM.
Have the TEAM Set Goals & Benchmark results.
The TEAM should include Owner/Sr. Mgmt,
Accounting, Safety, Legal and Insurance Personnel.
Include your Agent/Broker or Consultant. If not
able or willing, get a new one.
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
COST OF RISK
IDENTIFY IT
DOCUMENT IT
BENCHMARK IT
COMMUNICATE IT
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
CONTRACT ALERT: Fix Your Out-of-Date
Insurance Requirements!
Insurance Terms and Demands that use out
dated language / terms / Forms.
“Indemnification” Demand that does not match
up with the ‘Additional Insured’ Demand;
and Visa Versa . . . .
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
CONTRACT ALERT: Fix Your Out-of-Date
Insurance Requirements!
Stop treating “Certificates of Insurance” like Insurance
Contracts - they are not! Changes to a Certificate do not
change the Insurance Policy.
Stop asking for out-of-date ACORD Certificate forms.
Stop asking for ‘Notification’ by Insurers that is different
and/or greater than provided for to the ‘Named Insured’.
‘Notification’; try asking for the same notification rights
granted to the “first Named Insured”. Simply / Clear.
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
Build a ‘BEST PRACTICE’ WC System - Really!
Most Contractors still employ a ‘reactive’ nonintegrated WC Management System.
A WC Best Practice System that is detailed,
disciplined, reactive and accountable is a very
realistic objective.
Start with this: Ask your Team- What is our
lowest possible Experience Modifier? Ok, now,
how are we going to get there?
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
UPDATE YOUR HIRING PROCESS
Now is the time after Economic slowdown.
“Hire Slow & Fire Fast”. Most do the opposite.
Subject to your CBA - Make Employment offers
in writing and make them ‘Conditional’ upon:
Physical Assessment (yes expensive but significant ROI).
Drug Testing
Background Check / MVR Review
Update your Employment Application.
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
TECHNOLOGY E&O COVERAGE - CONSIDER IT
Very Underestimated Risk.
All Companies today have Internet &
Technology-related exposures.
Tech exposure rises as digital wireless networks
create nearly limitless access to information.
Liability associated with being breached by an
outsider; Data Loss & Business Interruption.
Liability associated with malicious code (viruses)
transmitted to a third-party.
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
EMPLOYMENT PRACTICES LIABILITY (EPL)
You don’t have this? You're kidding, right?
Could this happen to you?
Employee sues for wrongful termination, age and/or
disability discrimination, sexual harassment, failure
to promote, discipline, or hiring (or failure to hire)
practices.
Lawsuit brought by customers, vendors, and service
providers because your employee harassed them
{Optional third-party coverage}.
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
CONSIDER FLOOD INSURANCE
During a 30Yr Mortgage, 10.5% chance of Fire
damage; 26% of experiencing flood damage
(3X greater chance).
Eff 1/1/09 (post Katrina) new mandatory ISO End.
with broader ‘water’ exclusionary language.
Flood Coverage (including BI/EE) is available from
private markets and NFIP.
Ask about ISO Flood End. CP6510.
Ask Broker to Flood Map and present Coverage
Options for all Owned Property.
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
HARD MARKET COMING?
Concerned about Rising premiums?
Reduced or more expense Specialty Coverages?
Need to strengthen Loss Prevention Program but not
sure you will see positive effect on your Cost of Risk?
Budgeting your Cost of Risk on Projects that are 2 to 4
years to complete and collect?
Explore Alternative Risk Financing Options;
Now vs Later!
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
ARE YOU A CANDIDATE FOR A CAPTIVE PROGRAM?
Ask Yourself & Your Team:
Are there sufficient premiums to justify the
Captive option?
Are you prepared to assume more risk?
Do you have accurately documented loss
experience and do you believe in that history?
[ Look to your Cost of Risk benchmarked data ]
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
WHAT ARE THE BENEFITS OF A CAPTIVE PROGRAM?
Because ‘Funding’ is linked to your actual Loss Experience, the
immediate savings can be significant.
Joining a large financially sound Captive can provide more
predictable short and long term pricing.
Possible Tax burden relief .
Investment Income on your ‘Funding’ and all Reserves.
More direct connection between enhanced Loss Control &
Prevention program and your actual costs.
MORE CONTROL OVER YOUR ‘COST OF RISK’!
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
CRM for 2012 - REVIEW
1. Treat Your Corp Risk Mgmt Program more
like the Corporate Asset that it is.
2. Cost of Risk; Figure it / Benchmark it /
Communicate it.
3. Update your Sub/Vendor Contracts;
specifically update / coordinate your
‘Insurance’ & ‘Indemnity’ Sections.
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
CRM for 2012 - REVIEW
4. WC Best Practice Program; if you're not
sure what this is, then you don’t have it.
5. Update Your Hiring Process today to
realize some long-term ROI.
6. Technology E&O Coverage; currently a
very undervalued and underutilized Risk
Transfer tool.
CONSTRUCTION RISK MANAGEMENT
BEST PRACTICE SUGGESTIONS FOR 2012
7.
8.
9.
CRM for 2012 - REVIEW
EPL; a mature coverage that should be
considered part of a standard Insurance
Program.
Flood Insurance; consider it on all owned
Property.
Hard Market Strategy; seriously consider an
Alternative Risk Finance Option such as Large
Deductible, Loss Sensitive or Captive
Program.
CONSTRUCTION RISK MANAGEMENT
SPECIFIC INSURANCE STRATIGIES
AUTOMOBILE INSURANCE
 REVIEW ‘GARAGING TERRITORY’ OF ALL VEHICLES.
 IF YOUR FLEET CONSISTS OF 35 OR MORE PRIVIATE PASSENGER
VEHICLES, CONSIDER SELF-INSURING THE COLLISION
EXPOSURE. MAINTAIN COLLISION COVERAGE ON HIGHLY
VALUED VEHICLES.
 REVIEW IDEA OF DROPPING (A) MEDICAL PAYMENTS, (B) PIP,
 (C) UNINSURED COVERAGES. WHY? THE MAJORITY OF
PERSONS DRIVING OR RIDING IN A COMPANY VEHICLE HAVE
MEDICAL / LOST WAGE COVERAGE UNDER WC AND/OR AN
EMPLOYEE BENEFIT PROGRAM.
 DELETE VEHICLES THAT QAUALIFY AS “MOBILE EQUIPMENT”
FROM YOUR AUTO POLICY SCHEDULE [WARNING; REVIEW &
UNDERSTAND THE DEFINITION OF “MOBILE EQUIPMENT” IN YOUR
CGL POLLICY].
CONSTRUCTION RISK MANAGEMENT
SPECIFIC INSURANCE STRATIGIES
LIABILITY INSURANCE
 AUDIT AND UNDERSTAND YOUR CLASSIFICATION CODES.
MAKE SURE THE LOWEST-RATED CLASSIFICATION CODES
THAT APPLY TO YOUR OPERATIONS ARE BEING USED – BY ALL
BROKERS.
 TRUCK DRIVER PAYROLL;
EXCLUDE FROM YOUR CGL
OPERATIONAL PREMIUM BASIS. WHY? NEGLIGENCE ARISING
OUT OF THE OPERATION OF A VEHICLE IS COVERED UNDER
YOUR AUTOMOBILE POLICY.
 ‘OVERTIME’ SURCHARGES PAID TO EMPLOYEES – EXCLUDE
IN PREMIUM COMPUTATION.
CONSTRUCTION RISK MANAGEMENT
SPECIFIC INSURANCE STRATIGIES
WORKERS COMPENSATION INSURANCE
 LOSS SENSITIVE PLANS; CONSIDER THEM.
WHY? DEPENDING
ON YOUR PREMIUM SIZE, YOUR ACTUAL LOSS HISTORY, AND IF
YOU ACTUALLY BELIEVE IN YOUR OWN HISTORICAL DATA; A
LARGE DEDUCTIBLE, RETROSPECTIVE OR SELF-INSURED
PROGRAM CAN HELP COVERT YOUR WC PROGRAM INTO A
PROFIT CENTER.
 CLASSIFICATIN CODES;
CONDUCT YOUR OWN AUDIT. WHY? IN
GENERAL, PROPER CLASS CODES IS A “BEST GUESS”
UNDERTAKING. INTELLIGENT USE OF THE SCOPES MANAUL CAN
WILL EFFECT THE COST OF YOUR CURRENT & PRIOR YEARS
COVERAGE.
 PAYROLL LIMITATIONS; UNDERSTAND THEM.
WH7Y? IN MOST
STATES, THERE ARE LIMITATIONS ON OWNER/OFFICER PAYROLL NO MATTER WHAT CLASSIFICATION YOU ARE IN.
CONSTRUCTION RISK MANAGEMENT
SPECIFIC INSURANCE STRATIGIES
WC EXPERIENCE RATING
 CALCULATE A ‘TEST’ MODIFIER WITH DATA YOU BELIEVE
TO BE ACCURATE THEN COMPARE TO BUREAU ISSUED
MODIFIER.
 OPEN CLAIMS; REVIEW & NEGOTIATE 7 MONTHS FROM
YOUR RENEWAL DATE.
 LARGE LOSSES; VERIFY THAT THYE HAVE BEEN
PROPERLY LIMITED.
 AUDIT RESULTS; VERIFY THAT CORRECT ‘FINAL’ AUDIT
DATA IS BEING USED IN YOUR CALCULATION.
CONSTRUCTION RISK MANAGEMENT
CONSTRUCTION RISK MANAGEMENT ACTION PLAN
SPECIFIC INSURANCE STRATIGIES
PROPERTY INSURANCE
 BLANKET LIMITS; DO WHAT YOU HAVE TO DO - BUT GET THEM.
 DEBRIS REMOVAL INCLUDING ‘POLLUTION CLEAN-UP
COVERAGE; REVIEW / INCREASE IT. THIS CLAIM SCOPE HAS
THE POTENTIAL TO COST MORE THAN REPAIR OR REPLACING
THE DAMAGED PROPERTY.
 LAW & ORDINANCE COVERAGE; MISUNDERSTOOD AND
UNDERVALUED. THE LACK OF THIS COVERAGE (OR ENOUGH
LIMITS) IS A MAJOR REASON BUSINESS DO NOT REBUILD
AFTER A SIGNIFICANT LOSS.
 BUSINESS INCOME & EXTRA EXPENSE COVERAGE; VERY
MISUNDERSTOOD AND UNDERVALUED. FOCUS ON THE
‘EXTRA EXPENSE’ COVERAGE!
CONSTRUCTION RISK MANAGEMENT
SPECIFIC INSURANCE STRATIGIES
CLAIMS ADMINISTRATION
 LOSS DATA;
MAINTAIN YOUR OWN RECORDS. LOSS RUNS
ARE YOUR PROPERTY - - DEMAND THAT YOU AUTOMATICALLY
RECEIVE PERIODIC REPORTS.
 HAVE PERIODIC CLAIMS MEETINGS DIRECTLY WITH KEY
STAFF MEMBERS OF YOUR INSURER.
 PROPERTY / BUILDERS RISK CLAIMS; REQUEST ADVANCE
PAYMENTS.
 LARGE PROPERTY LOSS THAT INCLUDES LOSS REVENUE
AND/OR SIGNIFICANT EXTRA EXPENSES; CONSIDER HIRING A
PUBLIC ADJUSTER. THE COST/BENEFIT RATIO CAN QUICKLY
MAKE THIS AN EASY DECISION.
CONSTRUCTION RISK MANAGEMENT
SPECIFIC INSURANCE STRATIGIES
MISCELLANEOUS
 PREPARE FOR AND DEMAND EARLY DATE TO REVIEW HARD
RENEWAL OFFERS.
 PREPARE AND MANAGE PRECISE SPECIFICATIONS.
PRECISE SPECIFICATIONS INCLUDE SIMPLE BUT ACCURATE
DESCRIPTION OF OPERATIONS, SUMMARY OF RISK(S), AND
OUTLINE OF MINIMUM COVERAGE SCOPE.
 CONSOLIDATE EFFECTIVE / RENEWAL DATES.
 REVIEW ALL CONTRACTS CAREFULLY. CONTRACTUAL RISK
TRANSFER IS APPROPRIATE AND COMMON IN
CONSTRUCTION; BUT BEWARE OF UNUSUALLY BROAD HOLD
HARMLESS AND INDEMNIFICATION AGREEMENTS.
ACKNOWLEDGEMENTS
INSURANCE INFORMATION INSTITUTE
Gregory L. Peters, Seaton, Peters & Revnew, P.A.
IRMI / Practical Risk Management
IRMI / Construction Risk Management
Mark Garbowski, Anderson Kill & Olick, P.C.
Aaron A. Dean, Fabyanske, Westra, Hart & Thomas, P.A.
Staff & Risk Management Team of Kraus-Anderson
Insurance.
National Underwriter Property & Casualty News
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