Keeping Cost Of Risk In Check

Buyers keep casualty costs in line with higherretentions

Mark E. Ruquet

Despite insurers' double-digit premium increases, businesseswere able to keep their cost-of-risk increases below 10 percent byassuming more retention, according to a report issued by insurancebroker Marsh.

This was one of the key findings detailed in Marsh's “CasualtyCost of Risk 2004″ research report, said the report's publisher,Timothy Brady, a managing director in the broker's U.S. CasualtyPractice.

Comparing the cost of risk to businesses that were surveyed lastyear in the firm's 2003 report, primary casualty costs rose 6.9percent in 2003 despite double-digit increases by insurers. Thereport examined three areas of risk–workers' compensation, generalliability and commercial auto liability.

Mr. Brady said the percentage increase does not reflect thepressures businesses are under as they look for ways to cut higherinsurance costs, largely by assuming more retentions in the face ofsoaring premium rates.

The cost environment is not a “simple plug and chug,” hesaid.

The report notes that for businesses providing two years ofdata, workers' comp retentions increased 17.7 percent, generalliability rose 14 percent, and auto liability increased 12.5percent.

The report surveyed 1,433 business, compared to 1,050 last year.Like 2003s survey, the results are broken down into 23 StandardIndustrial Classification (SIC) codes for benchmarkingpurposes.

Based on a total increase in the cost of risk, rising from $1 to$1.07 for 2003, workers' comp still eats up the primary amount ofrisk costs, accounting for 66 cents of every dollar U.S. industryspends to manage its primary casualty exposure, compared to 65cents last year. General liability rose a penny, from 24 cents to25 cents. Auto liability saw the sharpest increase, going from 11cents to 16 cents.

Still consistent with last year's report, the size of thecompany affects the cost of insurance. Businesses with revenues of$200 million or less paid an average of $21.75 per $1,000 inrevenue for their overall cost of risk. Businesses with more than$10 billion in revenue paid $1.38 per $1,000 in revenue for theirrisk.

On the whole, U.S. businesses pay an average of $2.32 per $1,000of revenue for their risk.

Government entities had the highest workers' comp costs, thereport said, at $8.25 per $1,000 of revenue. Finance, banking andreal estate had the lowest at 24 cents per $1,000.

General liability costs were the highest for educational andnot-for-profit institutions at $2.38 for every $1,000 of revenue.Financial services again had the lowest costs at 14 cents.

In auto liability, transportation service companies had thehighest costs at $1.51 per $1,000 of revenue, which translated to$2,589 per vehicle.

For all three areas of risk, the mining and energy sector hadthe highest retentions.

The report found that retained losses are accounting for agreater proportion of risk costs than fixed insurance costs. Inworkers' comp, insurance costs accounted for 13 percent, whileretained losses accounted for 87 percent of expenses. On generalliability, insurance cost accounted for 21 percent and retainedlosses 79 percent. For auto liability, insurance costs were 20percent and retained losses 80 percent.

Because of the assumption of more and more risk by individualinsureds, managing those risks will become more and moreimportant.

In workers' comp, costs are impacted by high utilization rates,more severe injuries and illness, the expense of modern technology,and the high cost of prescription drugs, according to thereport.

Another driver of cost is the increased price for health care,which is projected to increase by 13 percent in 2004, the fourthyear in a row of double-digit increases. Health care costs haveseen steady increases since 1998, the report said.

The report noted that as the job climate improves and businessesbegin hiring new people, this could impact workers' comp costsbecause, traditionally, new employees have a greater likelihood ofinjury on the job.

Mr. Brady said this underscores the need for businesses toconcentrate on their risk management tools and training to reduceexposure.

“At the end of the day, while we are still talking aboutinsurance charges, the key to success is going to be managing lossexperience,” Mr. Brady noted.

The report gives some insights into what businesses can do tocontrol some of these costs and how to use benchmarking forimprovement.

Additional information and copies of the report can be obtainedby contacting Peggy Sherertz at 212-345-3393.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, March 12, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.