June 2003 DICTA

Managing Insurance Costs

	Original Publication: DICTA (Publication of the KBA)
	Author: Marc A. Upchurch, Business Manager for Kramer, Rayson, Leake, Rodgers & Morgan, LLP
	Date Published: June, 2003

Have you tried to make sense of the insurance market lately? As have all of my peers in law firm management, I have been surprised at the size of proposed increases and the audacity of insurers in the last couple of years. It is clearly a “hard” market and the insurers seem to be taking full advantage of it. Insurance is already a substantial cost to most firms and the expectation is that significant increases will continue for the foreseeable future.

The reasons for the rise are as numerous as they are varied. The insurance industry has been a “soft” market for many years and premium increases have not kept up with the costs. Insurance companies, large and small, are failing. The industry is in a consolidation phase (fewer competitors, higher costs for the user). Investment portfolio profits are down. Malpractice litigation has increased significantly in the past few years. Health care and pharmacy drug usage is up. Property and casualty risks are higher. Underwriter costs are increasing. Government mandates and regulation have increased the burden on insurers. Inflation is always a factor. Throw September 11^th on top of all this and its impossible to discern the real cause.

I attended a seminar recently where The Factors Driving Rising Costs in Health Care from 2001-2002 were delineated as follows (Source: Employee Benefit News: Benefits Sourcebook 2003, Volume 16 - PricewaterhouseCoopers, April 2002):

	Drugs, Medical Devices & Other Medical Advances (Usage) 22%
	Rising Provider Expenses 18%
	General Inflation (CPI) 18%
	Increased Consumer Demand 15%
	Government Mandates & Regulations 15%
	Litigation & Risk Management 7%
	Fraud & Other 5%

Of this list Usage I can buy, Government Regulations I can see but I question the amount assigned, and I’ll give them Litigation & Risk Management and Fraud & Other for simplicity. The other factors are “soft” to me. Rising Provider Expenses are probably up due to increased insurance costs which they pay themselves. Increased Consumer Demand, my personal favorite, is simply taking advantage of our needs at a premium for themselves (the old supply & demand model). General Inflation (CPI) makes up 18% of the increase. CPI from 2001 to 2002 was ~ 2.4%. Accordingly, if you receive a 50% increase in rates, this model would suggest that 9% of it is due to inflation (18% of the rate increase times a 50% increase). In short, 51% of our proposed increases seem to me to be because we need it, they haven’t been able to control their costs and they generally want more profits.

One more thing, I believe much of the September 11^th hype is an excuse. Sure, insurers will feel a significant erosion of their capital base, but they have the reserves. One source I looked at noted that losses were expected to run from $40 billion to as much as $70 billion out of some $300 billion in capital held by those insurers. Then you can deduct whatever the government (our tax dollars) covers out of those losses.

Now reality. Insurance companies have relied on the returns from their investment portfolios to support insured products and losses for a long time and the last 4 years have taken this away. There are a limited number of insurers and underwriters and demand is high right now. Frankly, it’s a “hard” market and insurance companies are taking advantage of it while it’s available to them. Generally, you get renewal quotes a few days before your current insurance expires, have limited time to look at other options and accept an unreasonable increase or substantially reduce your coverage just to get it all behind you. Insurers and underwriters hold these until the 11^th hour to make sure they don’t miss anything or that something doesn’t change that would impact their proposal negatively. You or your agent will have to push hard and stay on top of it.

I just reviewed a summary of first quarter 2003 results for 5 of the larger insurers. The most telling factor was the Combined Ratio (losses plus expenses as compared to premiums) of these companies. Historically, these amounts are in excess of 100%, which was offset by investment earnings. The average of the 5 I included in the summary was ~91% meaning the premium increases seem to have already resulted in a substantial turnaround in the financial health of these insurers before any investment returns are included. The summary also included some CEO comments which ranged from good to excellent first quarter results, record earnings, solid execution. Then it had an outlook with terms like downright giddy, expecting to continue with substantial rate increases, strategy is to reduce limits, significant opportunity, no end in sight

to a hard market and best domestic D&O rates ever seen.

Indications are that we will continue to see proposed rate increases in the 20% range across all lines of insurance, with substantially more than that (50% to 60%) in professional liability insurance premiums. We simply have to try managing this problem before it gets too costly and cumbersome to handle.

Now that I’ve gotten all that off my chest, how about some practical suggestions of how to manage the process better.

	Get an agent that specializes in the type of insurance your are seeking. A knowledgeable agent can help you identify your best options, understands which insurers fit your needs best, assists you in the application process, helps you sift through the intricacies of the various alternatives and helps you identify ways to manage your programs with minimal increases, while maintaining an acceptable level of coverage. Too often, we buy all our insurance from a friend or contact when their niche is only in one area.
	Require your current provider to provide you with loss runs 90 days before the end of your policy period. They are required to submit them to you at your request. While these are sometimes hard to read and understand, they will help you evaluate the insurer’s basis for increases. This will provide you with a tool to help evaluate how much margin your insurer is receiving on your coverage. It also provides you with information on your costs that can be useful in determining areas where concessions in coverage are least likely to affect your workforce while maximizing your cost savings.
	Start the quote process much earlier and require your agent to get competitive quotes. The whole thing will still drag out to the deadline, but hopefully you have had a chance to evaluate the reasonableness of the quotes from your current provider and the options available.
	Examine your true needs. Make sure your deductibles aren’t arbitrarily low compared to industry standards and your firm size. Especially in malpractice coverage, the insurer wants you to share the risk and a low deductible puts most of the risk in their lap. Generally, a $25,000 deductible is the minimum allowed, but most insurers want to see these amounts higher so the firms are on the hook first. Decide what you are trying to cover. If it’s a catastrophe, then maybe a higher deductible still meets that need. Look at your claims history and at the financial health of the partners to see what level of risk you can weather internally. Obviously, the higher the deductible the lower the risk to the insurer, thus the lower premium.
	Take some time in completing the application. An underwriter behind some desk far, far away from you will be determining the risk associated with your application. A haphazardly completed application could be your worst enemy. One wrong answer to a question they are focusing on, not enough information or too much information could put you in a higher risk category. This is where an agent that knows the industry can help save you a lot of money for many years to come.
	Evaluate your policies and procedures in light of the questions on the applications. They should provide you with insight as to what is expected or desired from a risk evaluation perspective.
	For health, life and disability insurance, inform your staff of the amounts and reasons for the increases. This helps them realize the benefit you are providing and gives them an understanding of why the increases are happening. Don’t be afraid to share the annual cost with them. Since most people only consider the amount they are paying, make sure to let them know your cost. Done correctly, they will appreciate you more. Hopefully, a more knowledgeable staff will help reduce the increases in the future.
	Consider increasing deductibles or reducing benefits, especially out of network benefits in a health plan.
	Consider cost sharing arrangements with your staff. Maybe set a base and have them cover a percentage of increases as they occur. Nothing brings out a desire to watch what you use better than a hit to the pocketbook of an individual. These last two have to be handled gently or they could backfire, causing staffing problems that are bigger than the insurance issue.
	Get an agent that specializes in the type of insurance your are seeking. I realize this one is in here twice. That’s because I consider it to be a necessity. If you do nothing else, this one can save you a ton of time, energy and money.

I don’t really like the benefit reduction option or just accepting a significant increase in the current year because they are much longer term decisions than one might realize. Once a benefit is lost, you will likely never see it again. Once an increase is accepted, all subsequent increases are compounded.

As an administrator or an attorney responsible for these matters, get a good agent (see I said it again), spend a lot of time understanding what you have and determining what you need, then work it hard by evaluating all your options. For our firm, these costs are second only to our payroll and they should receive attention accordingly.

The Web Master

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