Soft pricing, new insurance company entrants and increased competition have created new opportunities for contractors to reduce their overall cost of risk. Before deciding to change insurers, contractors should closely examine the benefits and costs associated with these opportunities.
Evaluation Checklist The soft insurance market invites competition among insurers, which creates an opportunity to reduce the ultimate net cost of insurance. While a good price can enhance a contractor’s competitive cost structure, the company often ends up getting what it paid for. It is critical to establish a baseline comparison of each carrier’s offerings—evaluating not only price, coverage and service, but also contractual obligations to others. A broker should lead the comparison and evaluation effort.
Explore the following criteria to help decide if it’s the right time to change insurers.
1. Agency Status
- Does the insurance producer have an agency agreement with this carrier? If so, is there a binding authority schedule?
- If this is a brokerage relationship, has underwriting authority been granted for the producer to issue certificates or other documents? If so, obtain a copy of the authorizing document.
2. Carrier Profile - Is the insurance company national or regional in scope?
- Is it a standard lines carrier or a brokerage/excess and surplus lines carrier?
- Does it have construction industry underwriting experience—preferably a 10-year history? Is the experience regional or national?
- What is the five-year history of financial and management rating (e.g., A.M. Best, S&P, Fitch)?
- Is it involved in a risk management or construction industry association? If so, for how long?
- What is the organizational and operational structure?
- What level of service is expected? What are standard response times from underwriters and loss control personnel?
3. Carrier Characteristics - Can the insurance carrier provide vertical support of contractor needs, such as changes in the size of risk, program design, territory and scope of work?
- What about the quality, accuracy and timeliness of policy changes and endorsements?
- Is the firm’s underwriting organization local or regional—and who is the point of contact for underwriting authority?
- Is the firm licensed to write insurance in all of the states in which the contractor operates? Is it willing to write and respond to local insurance requirements in all necessary states?
- Is the firm responsive on underwriting? Can it perform contract review, handle unusual certificate requests or underwrite non-routine owner/contractor insurance requirements?
- Who comprises the field audit staff—employees or contractors—and is a test audit service available?
- How is the claims organization set up? Are there local, regional or national claim centers? What are the adjusters’ workloads and desk authority? Is the firm willing to provide periodic claim reviews by phone or in person?
- What other claim-related services exist, such as claim service plans, notification of reserve/settlement closure and timely availability of claim data?
- What is the claim-paying philosophy, such as subrogation aggressiveness? What is the carrier’s attitude toward contractor choice of legal counsel versus carrier panel counsel?
- Does the firm have any international capabilities in underwriting, claims and loss control?
- Regarding loss control, is the carrier proactive and client-driven, or inspection and carrier-driven? What sort of loss-control resources are available (e.g., web-based library, specialized training or outsourced resources)?
4. Carrier Proposal and Responsiveness
Contractors should ask their brokers to be sure the quoting carrier has designed an accurate program, articulating terms, conditions (e.g., deductibles and retentions) and exclusions. Check whether the service plan for underwriting, claims and loss control is included in the quoted premium or unbundled and charged separately. Is the proposal quoted gross or net of commission to the producer?
The lines of coverages impact the total value, so be sure key coverage definitions line up so there are no issues with things like mobile equipment liability versus auto or umbrella definitions. Also ask about additional insureds: Is completed operations coverage available? Under what form and pricing is it provided?
Some carriers offer an annual policy or multi-year program; check whether limits of coverage will be reinstated at the end of the year. Carriers also differ in their use of facultative reinsurance.
Be sure the carrier addresses special needs, such as manuscript endorsements, state or railroad protectives, and certificates.
Pitfalls of Changing Carriers
Before making a move, contractors should obtain references from three similar construction firms. The broker should be able to speak to the carrier’s attitude toward building relationships between carrier staff and the contractor’s management team.
Due diligence also demonstrates that moving to a new insurer has downsides. First, any accumulated premium for claim payments is lost, which can adversely affect a contractor’s loss ratio at renewal.
Second, the carrier’s knowledge of the contractor’s operations and workflow is lost. The new insurer will have to build that knowledge, which involves time and effort. The shift will upset existing workflows and organizational relationships. How will certificate requests, coverage changes or additions, claims reporting and loss control efforts be handled?
Third, the move may adversely affect the prior carrier’s willingness to re-write coverage if the need arises.
Finally, note that the soft pricing market brings in new insurers that may not remain in the construction business for the long haul, so contractors may be forced to replace their new carrier in the near term. The replacement carrier’s service standards may not be equal to the prior carrier’s, or it may charge more for the same services.
Outcome
Looking at price and coverage is a smart exercise. A contractor’s independent broker is uniquely qualified to establish the ground rules and criteria against which the competition can be evaluated.
A thorough carrier evaluation process by both the broker and the contractor will help avoid potential pitfalls. This process should result in a level comparison between competing carrier offerings and allow an informed business choice to be made. It may make sense to take advantage of the current competitive market—either by introducing competition into an existing insurer relationship or by moving carriers altogether. But, do not take this process lightly.
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Wednesday, February 8, 2012