Small Employers See Higher Insurance Costs Size matters when it comes to the cost of insurance, according to a study by New York City-based insurance broker Marsh, which indicates that smaller employers pay a larger portion of their revenues for insurance management costs than larger ones.
The study, entitled "Casualty Cost of Risk 2003," asked 1,050 respondents across 23 industry classifications about the cost of insurance compared to revenue. The report examined the combined costs for a policyholder covering workers compensation, general liability and automobile liability, which account for about 90 percent of "total financial outlays" in insurance coverage for U.S. corporations.
The study found that, on average, U.S. employers spend $2.45 for insurance and other risk management solutions for every $1,000 in revenues to manage their casualty risks.
However, the costs varied dramatically according to the corporations size. For companies with revenues of $200 million or less, their total costs averaged $18.74. While the largest corporations, with revenue above $10 billion, averaged $1.68 per $1,000 in revenue.
Companies with revenue between $501 million and $1 billion paid $6.89 per $1,000 in revenue. This appeared to be the median range because costs dropped dramatically over the $1 billion mark, starting at $3.53 per $1,000 for companies with revenues between more than $1 billion and not more than $5 billion.
The report breaks down the revenue categories into six different groups.
Breaking down the overall average of $2.45 per $1,000 of revenue by line, Marsh found that $1.52, or 62 percent, went to workers comp, while 65 cents, or 26.5 percent, went to general liability and 28 cents, or 11.4 percent, to auto liability.
In the area of workers comp, the 167 companies in the smallest revenue category paid an average of $9.98 per $1,000 of revenue. Corporations in the largest revenue group (over $10 billion)89 in allpaid only $1 per $1,000 of revenue for workers comp.
For general liability, the cost was $5.63 for the smallest compared to 52 cents for the largest corporations in revenue.
Auto liability was $3.13 for the smallest compared to 16 cents for large corporations.
"Larger employers have been able to enjoy similar economies in each of the three areas of risk we examined," said Timothy P. Brady, managing director in the Casualty Practice of Marsh, in a statement. "As a result, they generally enjoy a competitive advantage as respects the casualty insurance component of their overall cost of goods sold.
"However, theres no question that an organizations cost of risk might be more affected by how it manages its risk and is perceived by an insurer than by its size," he added. "For example, a small firm that effectively manages its exposures can have a lower cost of risk than a larger company with poor risk management."
The 79-page study also breaks the costs down among 23 industry classes.
At the high end was governmental, whose average casualty costs came in at $8.94 per $1,000 of revenue. Finance, covering banks, holding companies, real estate and others were the lowest at 59 cents.
Marsh said the data were compiled through Oct. 2002 and refined at the Jan. 1, 2003, insurance renewals.
The study was done in response to risk managers requests for more quantified information to help them benchmark their own programs, Mr. Brady told National Underwriter.
He said the survey is the most current snapshot on the costs driving insurance programs post 9/11. It also includes the largest survey population to date of any similar type survey, he said. Data was collected from bound insurance contracts ensuring the accuracy of the information, he added.
Mr. Brady noted that while a lot of attention has been paid to the cost of risk from terrorism, asbestos and mass tort litigation, these are not the insurance cost drivers for corporations.
The report reviews market conditions and reviews in detail the insurance expenses for the individual industry classes. It also gives advice on what corporations should be doing in the future to manage their insurance costs.
"While all of these approaches can be productive in terms of managing costs, organizations need to pinpoint whats driving their costs and invest in approaches that yield the best results," Mr. Brady noted.
Reproduced from National Underwriter Edition, March 3, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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