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 of the increasing cost of insurance as well as a better understanding of why certain industries are impacted more. Not to worry though, we have a few solutions for you as well.
It may not come as a surprise, but insurance companies utilize premiums to pay for any claims that may occur and their expenses and still make a profit. If they paid more in claims than they make in premiums, then they wouldn’t be able to operate for very long. Insurance companies typically have a target loss ratio, which is calculated by dividing claims paid by the premium collected. Alternatively, some may use a combined ratio, which is calculated by adding operating expenses and claims paid then dividing by premium collected. If this number is higher than 1, then the insurance company is operating at a loss, which as you can imagine, is bad. The premium collected varies greatly depending on the industry, type of policy, and type of client.
More specifically, the construction industry, unfortunately, tends to have higher premiums because insurance companies anticipate there to be more claims. There are multiple reasons for this, from the unpredictable nature of the industry to general insurance trends. Construction is a very uncontrolled environment, meaning that anything can happen. This unpredictability could lead to higher-value injuries or more claims. Injuries could also lead to an employee being unable to return to work, in which a worker’s compensation claim would require funds for both the injury and future wages for the said employee. Additionally, individuals other than employees can become injured at job sites or there could be damage to a building or project which is highly unpredictable, explaining why general liability premiums can be high for the construction industry. Unfortunately, there is also a general rise in the cost of claims for auto insurance leaving those companies with large numbers of vehicles to pay higher premiums.
Additionally, the term “Fund for Severity” may help to provide some clarity as to why premiums are higher for construction companies. In order to cover expensive claims, insurance companies need to charge higher premiums for the industry so as to distribute the cost of these expensive claims without placing the burden entirely on a few companies.
There are many things that construction companies can do to mitigate their risks and lower their costs. Increasing safety measures and preparedness through driver screening, driver training, drug testing, and toolbox talks allow a company to operate with a reduced likelihood of incurring a claim. Additionally, a company can proactively handle claims by altering its procedures and creating opportunities for modified duty in the case of Workers’ Compensation claims.
Another option for construction companies is to enroll in a captive program. Captives are alternative options for self-funding your insurance in a controlled and stable environment. Premiums will be lower for this structure because captives are based on the individual company’s loss experience rather than the industry as a whole. Additionally, they do not operate with the purpose of making a profit and have better safety and claims handling. Overall, a captive can majorly improve a construction company’s insurance costs and help to mitigate a lot of the risks that face the construction industry.
While one solution certainly does not fit all, I highly recommend that you reach out to your insurance agent and explore the opportunities available to you. Who knows, maybe a captive program is within your reach? Give us a call or email info@ekmcconkey.com.
