The construction industry has seen a continual rise in premiums which can become a financial frustration and burden for construction companies everywhere. Examining the relationship between premiums and claims history can provide a more in-depth view for the increasing cost of insurance, as well as a better understanding of why certain industries are more heavily impacted. Not to worry though, we have a few solutions for you!
Insurance companies utilize premiums to pay for any claims that occur and to cover their expenses while hoping to have some leftover for profit. Much like a contractor who bids jobs below cost just to stay busy, if insurance companies continually pay more in claims than they charge in premiums, they won’t be in business for long. Insurance companies typically have a target loss ratio, which is calculated by dividing claims paid by the premium collected. Alternatively, they also look at their combined ratio, which is calculated by adding operating expenses and claims paid, then dividing by premium collected. If this number is higher than 1.0, the insurance company is operating at a loss, which as you can imagine is not a good business strategy. The premium collected varies greatly depending on the industry, type of policy, and loss experience. For contractors, the biggest drivers of premium are total payroll, revenue, and number of vehicles.
Why Construction Tends to Have Higher Premiums
Unfortunately, the construction industry tends to have higher premiums because insurance companies anticipate there to be more claims and more severe claims. Working from heights and around heavy equipment can result in substantial workers’ compensation claims and severe automobile accidents lead to seven-figure claims that are more common in construction than in other industries.
Additionally, minor injuries can result in big claims if the employee is unable to return to work, in which a workers’ compensation claim would require funds for both the injury and future wages for said employee. Other contractors on the jobsite or people near the jobsite can be injured or there can be damage to the project during the course of construction. Unfortunately, there is also a general rise in the cost of such claims for auto insurance, leading those companies with large numbers of vehicles to higher premiums.
The term “Fund for Severity” is used in the insurance industry as a term that explains why some construction companies have very low loss ratios for many years, but don’t see a reduction in premium. In order to cover expensive claims that are inevitable in construction, insurance companies need to charge higher premiums to all companies to cover the large claims that will be had by a few companies.
What Construction Companies Can Do to Mitigate Their Risks
Increasing safety measures and preparedness through driver screening, driver training, drug testing, and toolbox talks allow a company to operate with lesser risk for claims. A company can proactively handle claims by altering their procedures and creating opportunities for modified duty in the case of workers’ compensation claims.
How Captives Can Help
Captives are alternative options for partially self-funding your insurance in a controlled and stable insurance program. For companies that improve their loss experience, rates will decrease over time. Captive costs are based on the individual company’s own loss experience rather than the industry as a whole, which has to price for unsafe companies who do not manage claims proactively. Additionally, captives do not operate with the purpose of making a profit so members are essentially “buying insurance at cost” with the opportunity to earn back unused premium dollars. Captives can have additional resources for safety and claims handling that are tailored to a specific industry to help their members better control their claims. Captives are often the solution for a company who has good loss experience and is looking to gain control of their insurance costs.