Captive Insurance Results in Savings Contractor

How would you like to actually reclaim a portion of your workers compensation and liability insurance premium each year? Sound too good to be true?

Not for companies with a good safety performance record that are part of a captive insurance program we helped form called Specialty Trades Insurance Company (STIC). Established in 1991 by a group of primarily mid-sized electrical and mechanical contractors, the organization has grown to 30 contractors - each who stands to benefit through lower premiums the next year and the possibility of having a portion of their premium returned, if they have good safety performance.

The concept originated as a response to the roller coaster rates offered by the conventional insurance carriers, most of whom are not traditionally “contractor friendly.” As any contractor knows, traditional liability premiums for workers’ compensation, auto insurance and general liability coverage, are set based on the safety performance record of the entire industry.

By joining together and sharing the risk, we realized we could exercise greater control over our annual insurance premiums and reduce costs. Furthermore, by limiting membership to those companies that already have a good safety record, we would all be rewarded for our safety records.

Having the idea was one thing, but finding a broker who could provide the structure and management was another matter. The development of a captive insurance company grew out of discussions with A. J. Gallagher, a Chicago area insurance broker who had provided our company with liability insurance for many years. The concern about rising costs, voiced not only by us but others in the industry, led Gallagher to develop to form this captive. It was designed to reward contractors with good safety records, by providing them workers compensation, automobile insurance, and general liability coverage at very competitive rates.

From the onset, Gallagher did its utmost to help us develop the basic plan as well as taking the lead to encourage participation by other companies in our industry which had good safety records.

The concept behind a captive insurance company is that it is owned, supported and controlled by its shareholders. An insurance broker provides a common carrier, just like in traditional insurance, but the members limit their exposure on every loss. Our captive controls losses up to $350,000.

Each member makes an initial investment to fund our ultimate losses. To determine the premium, each member’s previous five-year loss history is collected, and the data is then trended by an independent actuarial firm. The firm produces a member’s predictable frequency losses and what should be reserved for severity losses (those above $125,000). These become the members’ loss funds (used to pay for claims).

The fixed costs of the program are negotiated annually and use pre-determined rates for reinsurance, fronting costs, claims service, loss control, brokerage and consulting. The loss fund and fixed costs together produce the premium for the year. In addition to premium charges, a member can be assessed (with limitations) if their expected losses exceed the contributions for the year.

Each owner has a seat on the Board of Directors and participate in meetings twice a year, and focus on one of three committees: Underwriting, which evaluates potential new members; Risk Control, which sets, monitors and reports loss control goals for members; and Finance, to advise the board on company finances.

If we are effective at controlling claims and avoiding accidents, we have the potential to reclaim a large portion of our premium dollars on claims. A strong emphasis on reducing claims and practicing safe work habits has put added encouragement on the safety directors at each company, in a positive way. They meet at two Risk Control workshops each year to discuss and share how they avoid claims and to create incentive programs that will improve safety.

For example, an idea we heard about from another member company and then implemented ourselves, is an incentive program called “safety bingo.” All employees receive a bingo card. Each week, a couple of numbers are posted. If there were no accidents during the week, two more numbers go up and so forth until someone wins. It’s fun and really makes everyone conscious about safety, not just for themselves but for their co-workers.

Premiums have proven to be stable and consistent year to year, depending less on external factors like the insurance market and determined more by the contractor’s own safety record and claims experience. As owners, we believe we have saved 10 to 30 percent annually in premium costs. At Air Comfort, we paid the same premium in 2001 that we did in 1991 despite the fact that our revenues doubled in that time. Furthermore, the more members we’ve recruited, the less impact any one claim has on the entire membership.

Alternative insurance programs are growing. They already have captured over 35 percent of the market. Conventional insurers are increasingly left with the high-risk firms. Coupled with the massive changes in the insurance industry since September 11, it’s pushing premiums even higher.

This fact alone should motivate companies to improve their safety record so they can join or start a captive insurance program, and reap the many rewards and benefits. Through STIC, a group of contractors has learned that insurance is a manageable cost. We have been able to virtually take control of our insurance destiny.