In today’s challenging economic environment, construction companies are eager to gain information on how their risk management and insurance programs compare with peers from a cost and performance standpoint. When exploring options, companies with critical insights into what others in their peer group are doing are in a stronger position to negotiate favorable terms and rates with underwriters.
The influx of “Big Data” in the insurance industry allows some risk advisors to provide clients with sophisticated benchmarking analysis. However, many others do not have access to the data or the technical capabilities to properly leverage the information, which leaves some clients in the dark when it comes to decisions about their insurance program.
The Value of Benchmarking Data
Having access to peer group benchmarking data is not only critical to the decision-making process but can also help construction companies avoid uninsured or underinsured losses.
Imagine a mechanical contractor that has for years maintained a $25 million umbrella limit of liability on the advice of its current broker — a risk advisor who lacks access to sophisticated benchmarking tools. Management is not aware that similarly sized industry peers are now selecting $50 million as a prudent limit for their business based on project size and complexity.
If a construction defect claim occurs, and a $40 million settlement is awarded to the project owner, the $25 million limit will not provide adequate coverage and the company would be forced to absorb a $15 million coverage shortfall.
Benchmarking can expose weaknesses in current insurance programs and provide companies with an opportunity to make corrections before it results in financial loss.
Using Benchmarking Data to Gain Control
The good news is that construction companies are able to gain greater control over insurance placement and program design decisions by leveraging benchmarking data. This can help avoid leaving the process to chance or the whim of underwriters.
For example, companies that have done their research before approaching markets can decide on a preferred program structure, the desired terms and conditions, as well as identify what it deems to be the appropriate premium, limit and deductible. With the support of a broker who has leverage in the market, companies are better positioned to obtain the best coverage for their premium dollars.
Consider an infrastructure contractor operating in multiple states as an example. The company has been on a continuous growth trajectory, and their projects tend to be getting bigger and more complex. The CEO recently requests that the CFO and risk manager justify their current insurance program limits and premium spend.
In response, the risk manager and CFO partner with an experienced broker to analyze the company’s loss history, loss projections and current casualty program, benchmarking the program against industry peers. The analytics show the company’s current premiums are priced competitively but current limits are in the low range compared to peers. Using the forecasted casualty losses as well as benchmarking results, the broker is able to negotiate additional umbrella limits at improved premium with underwriters.
The result? The CFO is able to provide quantitative analysis and recommendations to senior leadership. In turn, the analysis enables the board to confidently increase its umbrella limits by $25 million and obtain a lower cost structure, further protecting the company’s assets and financial interests. This example illustrates the power of “Big Data” and the importance of working with an experienced risk partner.
Demanding More
Construction companies demand sophisticated data and analytics to compete in today’s business environment. Questions for contractors to consider when evaluating their insurance programs include:
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