Today's Solutions for Tomorrow's Risk Management Challenges
Strategic Risk Advisors approaches challenges with a completely open mind "thinking outside the box" instead of using the common solutions. We strive to provide high-quality solutions to increase your efficiency and productivity.
CHALLENGE - Specialty Contractor Faces Workers’ Compensation Premium Increase of almost 30x Expiring
Strategic Risk Advisors was contacted by counsel representing a specialty residential contractor. Their Assigned Risk Workers’ Compensation insurer had determined that the prevailing job class code for their employees was incorrect. The change demanded by the insurer would generate a 3000% increase in Worker’s Compensation premium – a very significant increase of more than $675,000 annually. There was no appreciable change in business operations from the previous year. Additionally, many insurance companies prefer not to insure contractors that subcontract most of their labor, reducing the available insurance companies willing to offer coverage to our client.
Working with several insurance brokers, including at least one specializing in high-risk Workers’ Compensation exposures, a favorable solution was developed. Through this process, we identified at least one traditional insurer that offered a solution to this safety conscious contractor. However, this solution still represented an estimated cost increase of almost 400% (significantly lower than the 3000% from the incumbent). Additionally, we suggested alternative approaches including a minor operational change as well as restructuring the employment arrangement to include a Professional Employer Organization (PEO) whereby a co-employment relationship would be created.
The result was that our client transitioned to a PEO that would provide both Workers’ Compensation and Payroll services. The transition in payroll services freed up compensating balances being maintained by the bank-based payroll processor. Additionally, the increase in Workers’ Compensation premium costs was less than 15% - about the same as the current market for this line of coverage as well as eliminating the payroll audit process. Net premium savings to our client was more than $600,000 annually.
CHALLENGE – Insurance Program Review and Restructure for a “Going Public” Company
Real estate development and management company with over $200M in insured values is preparing for a potential “going public” transaction to a Real Estate Investment Trust (REIT). They currently have individual insurance policies for each of approximately 12 managed properties. Additionally, its employee benefits programs were splintered with at least 5 different firms involved in a roughly 25-person organization. They wanted to be sure that their insurance program was structured to reflect the sophistication, coverage levels, and efficiency appropriate for a public entity.
Strategic Risk Advisors was engaged to review the current insurance program structures, recommend any appropriate changes, and assist in the implementation of these strategies. Our review of over two dozen insurance policies found inconsistent coverage and several coverage gaps. As a result, we coordinated an insurance broker review and selected an alternate insurance broker to review the program as well as to better understand the strategy used by the current broker. At the conclusion of this process, our client successfully consolidated its insurance program, significantly reduced the number of insurance policies to be managed and administered, obtained more comprehensive, consistent insurance coverage, and REDUCED their premium cost by 42%.
Additionally, we recommended that our client consider a Professional Employer Organization (PEO) as a way to consolidate its Human Resources/Employee Benefits functions in order to reduce the administrative and compliance burdens of these functions.
CHALLENGE – Major Course of Construction Property Damage/Business Income Loss
A real estate owner was developing a convention center hotel in an urban environment. As a result of the roof installation, during a major torrential rainstorm about six months before opening, water penetrated the roof and ran down the mechanical chases affecting as many as 700 individual hotel rooms in various stages of completion. Our client embraced a zero-tolerance policy for airborne fungal spores. The challenge was that the restoration would cause not only a significant cost, and a delay of approximately six months in the opening of the property.
Strategic Risk Advisors was immediately notified of the incident, traveled to the site, and began photo documenting the loss. In addition, we coordinated with the hotel management company for appropriate isolation of costs not only for the restoration which was being managed by the General Contractor and the Developer/Owner, but for lost business income, performance penalties for contracted events (including a wedding), and additional marketing expenses. We also became active members of the “Strike Team” meeting onsite at least twice each month regarding the restoration progress, strategies, and costs. As the primary contact with the Builder’s Risk insurer on behalf of the Owner, we coordinated the claim process of a $10,000,000 restoration. Additionally, we successfully negotiated a Business Income and Soft Costs claim based on incurred finance costs for the entire six-month delay as well as the present value of six months of budgeted stabilized business income five years in the future. As a result, this property had a positive cash flow for its first six months – before registering its first guest.
CHALLENGE – Insurance Broker Service Deteriorated after Acquisition
A specialty food retailer had an insurance brokerage relationship that had endured acquisition at least three times and was no longer confident that it was receiving the level of service it required.
Strategic Risk Advisors was engaged to assist this firm with a review of its insurance brokerage relationship. In doing so, we coordinated with the Chief Financial Officer (CFO) to select a target mix of not more than five brokers representing different segments of the market. After preparing a Request for Proposal and reviewing the written responses, the competing insurance brokers were invited to make 90-minute personal presentations during which time questions could be asked and conversations would allow for elaboration relating to our client’s concerns. The result of this process was that the incumbent insurance broker retained the account. However, as a result of the process, they became more aware of the concerns, the Regional Managing Director of this national broker became involved, and the service level was dramatically improved.
CHALLENGE – Complete Risk Management Review and Insurance Broker Realignment (Property/Casualty – Employee Benefits – Personal Lines)
The Family Office of a high net worth family involved in several private business opportunities was concerned that its insurance and risk management program had not evolved over the years as the firm’s business operations and demands had. All its insurance relationships were in excess of a decade old and never reviewed for current alignment with management’s goals and objectives.
Strategic Risk Advisors was initially engaged for the review of current business operations and the current insurance program with the goal of documenting the current structure as well as developing any appropriate recommendations. Additionally, we were engaged to review the Personal Lines insurance programs for three generations of family members as well as the general structure of the Employee Benefits programs. As a result of this process, we identified a number of entities for which coverage may not have been properly addressed in the current insurance contracts, significant inconsistencies in the use of deductibles and retentions as compared to the risk tolerance of the organization, a medical insurance program that did not offer current state of the industry options, self-assumed risk levels that were not indicated by the loss analytics, and questionable ability of at least one broker to meet the needs of this highly demanding organization.
We were then engaged to assist the Family Office in the implementation of our recommendations as well as to function as an outsourced Risk Manager during this process. As a result of this process, over the following 18 months each service relationship was reevaluated through a conceptual review process with five different (including the incumbent) proposing to service the account, each insurance program was reconsidered from the ground up in order to fill any coverage gaps that had developed, a complete loss analysis was embarked upon allowing reconsideration of deductible/retention levels, and a significant return of collateral guaranteeing high deductibles/retentions was negotiated with insurance companies.
Bottom line – a more comprehensive and cost-effective insurance program is in place while retaining many of the incumbent insurance underwriters. The brokerage team has been realigned with the organization’s goals, objectives, and demands producing a reduction in commercial insurance brokerage service fees by almost 40%, and medical costs for this 600 life group has remained flat for its last two annual renewal cycles – in part due to a renegotiation of their prescription drug management program.
CHALLENGE – Controlling Workers’ Compensation Costs
A major non-profit organization was experiencing significant growth in its self-funded Workers’ Compensation expense – approaching 3% of gross revenues. Based on this expense level, the cost of Workers’ Compensation had become an item of concern to the Board of Directors. The organization wanted to know what was causing this significant cost increase, and what could be done to better control this significant expense.
Strategic Risk Advisors was retained to report directly to the CEO as we had no current relationship with the current insurance companies, brokers, or any employees within the organization – we brought total objective independence to the process. After accepting this engagement, we assembled a team of professionals that could effectively examine the different aspects of the organization and what was driving this expense. Included on the team was a Loss Control Engineer as well as a claims processing professional.
During this project, we interviewed members of the senior management team including the heads of each operating unit as well as the Director of Human Resources. We secured 3 years of claim data which was analyzed for loss patterns and trends. Additionally, we selected a random sample of claims over the past three years for auditing as compared to claims best practices. The claims audit took place at the office of the administering insurance company. Lastly, we performed site visits at a number of locations for this organization in order to better understand its operations as well as to observe safety conditions.
As a result of our efforts, several recommendations were made relating to the management of its Workers’ Compensation program. We suggested changes both in the management of the claim function as well as how management oversees organizational risk in general. Recommendations were also provided to improve the favorable safety culture of the organization, for which we were pleasantly surprised during our site visits. While we were not retained to implement our findings, it is our understanding that as a result of our report, several of our recommendations were implemented, some of the service providers were realigned to the goals of the organization, and based on our analytic review, the level of collateral required by the insurance companies to guarantee the self-funding was significantly reduced.
CHALLENGE – Contract Compliance and Loan Agreement Review/Negotiation
A real estate developer was negotiating the financing of a major urban multi-use project with hard costs in excess of $100,000,000. They were concerned about the insurance terms required by the lender and whether their current master insurance program would comply.
Strategic Risk Advisors was engaged to assist in the review of all project agreements including those for the loan. We found several incongruities between the requirements of various documents including the construction management, equity funding, loan, franchise, and property management agreements. Additionally, we found what we considered to be onerous language in the proposed loan agreement, particularly as respects the use of insurance proceeds in the event of a loss. The loan allowed the lender to retain all insurance proceeds and apply to the loan principal in their sole discretion.
As a result of our efforts, the various documents were brought into sync with each other including establishing priority relating to the use of insurance proceeds as well as the limits and coverages required to be insured. Additionally, we were able to secure alternate language from the lender establishing various loss thresholds at which the Owner had sole control over repairs and restoration, levels at which the lender would hold and disburse restoration funds, as well as an agreement that proceeds would only be applied to principal in the event of a default.
Challenge: Employee Benefits Cost Control
An organization of about 600 employees with operations in 12 states self-funded their employee medical care benefits. Like many companies, they had experienced significant costs increases over the past several years – some years in excess of 15% and managed this ever increasing expense by reducing benefits, increasing employee contributions, and limiting pharmacy choice.
In conjunction with the company's benefits broker, Strategic Risk Advisors assisted in reviewing the analytics of the claims experience. We recommended implementing care management processes including chronic disease management to improve employee care while controlling costs. We also assisted with the evaluation and remarketing of the stop-loss insurance and prescription drug programs which were previously bundled with the same insurance company that administered claims. The net result was first year cost savings in excess of $250,000; two consecutive years with no increase in cost or reduction in Plan benefits; and a broadening of pharmacies available to their employees.
Challenge: Property/Casualty Insurance program not aligned with business operations
A residential community real estate developer had used the same small insurance broker since they began business over 20 years ago. The owner of the insurance agency and the owner of the development company had a strong personal friendship. The developer's company had grown significantly, and the newly hired Chief Operating and Finance Officer was concerned whether the agent's capabilities and sophistication had grown to meet the needs of the development company.
Strategic Risk Advisors was retained to review business operations and insurance program structure. Included in our review was an organizational analysis that found not all of the entities to be included on the appropriate insurance policies. Additionally, we found a number of coverage gaps, the most significant being an absolute real estate development exclusion. This meant that any liability claims arising out of the company's primary business activity would not be covered. Through our independence and objective approach, we coordinated a broker evaluation and search which demonstrated that the agent's capabilities and sophistication had not grown to meet the growing demands of our client and cultivated a transition to an insurance broker more capable of servicing the company's growing needs – while minimizing any impact on the personal relationships. Furthermore, we assisted in the specification, marketing, proposal evaluation and implementation of a restructured more comprehensive insurance program that better aligned with the business structure and operations.
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