Firms Resist Changing Insurers

By Curtis Williams, Marsh Inc. | September 28, 2010

In sharp contrast to the previous year, large and mid-size U.S. businesses generally remained loyal to their insurers in 2005 for their workers' compensation, auto and general liability risks — their primary casualty programs — according to a just-issued study by Marsh Inc., the world's leading risk and insurance services firm. Last year, only one in nine businesses changed insurers, a major shift from 2004, when one firm in four dropped its incumbent insurer.

Overall, for every $1,000 of revenue, U.S. businesses spent an average of $2.68 on insurance and other measures to manage their primary casualty risks. Workers' compensation costs averaged $1.80 per $1,000 of revenue, while general liability costs were $0.59 and auto liability, $0.29.

These conclusions are based on data compiled during 2005 from 1,638 businesses and government entities, the largest data population in the industry.

The study, which also analyzed firms reporting cost information for each of the past two years, found that while costs remained relatively flat, companies retained slightly more risk. Among these firms, the cost of their primary casualty risk declined by 3.0 percent. Meanwhile, retentions rose 2.2 percent in workers' compensation as costs dropped by 4.4 percent; retentions rose 6 percent in auto liability as costs dropped by 5.3 percent, and retentions dropped 4.5 percent in general liability, while those costs rose by 4.1 percent.

"Despite a relatively stable market, businesses have been fine-tuning their casualty insurance arrangements to strike the right balance between their premium costs and retention levels," said Curtis Williams, Casualty Practice leader for the Marsh office in Charlotte, N.C. "They're moving retentions up or down to take advantage of a more competitive insurance market and to get the best deal."

The study found that large employers continue to enjoy significant economies of scale in the purchase of insurance and use of other risk mitigation approaches to address their primary casualty exposures. Notably, average cost per $1,000 of revenue for small employers was more than eight times what it was for the largest companies in 2005. Firms with more than $10 billion in revenue have risk costs associated with their casualty programs of $1.76 per $1,000 of revenue, versus $15.08 for those with $200 million or less in revenue.

"While there's no question that larger employers enjoy economies in each of the three areas of risk we examined, they also have more resources to invest in approaches to mitigate these costs," said Mr. Williams. "As a result, they generally enjoy a competitive advantage as respects the casualty insurance component of their overall cost of goods sold."

Marsh examined the cost of insurance for workers' compensation, auto and general liability. The report considers expenses associated with casualty risk transfer, funding, and administration, including retained losses, claims handling and associated administrative costs.

Among all size companies, workers' compensation costs far exceed those associated with the other exposures. The 67 cents of each casualty dollar spent on that risk is followed by general liability at 22 cents and auto liability at 11 cents. Companies employing loss-sensitive programs saw the vast majority of their costs (82 percent to 91 percent, depending on the line of coverage) represented by retained losses and related claims-handling charges.

"This places the ability to control overall costs squarely in the hands of the employer," Mr. Williams noted. "Even companies with guaranteed-cost workers' compensation insurance programs need to take steps to promote safety, prevent injuries and manage loss costs; or else their renewal insurance premiums may rise if their loss experience is worse than expected."

Marsh's study also reported casualty cost of risk trends for 23 industry groupings.

At $9.76 per $1,000 of revenue, governmental entities had the highest workers' compensation costs. Insurance companies had the lowest relative costs (34 cents), followed by financial services, including banking and real estate (48 cents), and chemicals and pharmaceuticals (51 cents).

Marsh also examined the average cost of individual workers' compensation claims for each of the industry sectors and found mining and energy to have the highest average incurred cost per claim — $10,915. That was followed by the costs for non-nuclear utilities ($10,536) and construction ($9,492). At $2,828 per claim, transportation equipment companies had the lowest costs, followed by miscellaneous light manufacturers ($4,085) and manufacturers of machinery ($4,409).

"Workers' compensation historically has accounted for the lion's share of casualty risk costs, and that's evident across nearly all of the industry sectors we've examined," Mr. Williams said. "It continues to be the focus of coordinated approaches that examine and seek to address key cost drivers, from safety and wellness programs that aim to prevent injuries and illnesses, to more effective ways to track and manage claims.

"While all of these approaches can be productive in terms of managing costs, organizations need to pinpoint what's driving their costs and invest in approaches that yield the best results," he noted.

In the other casualty insurance lines, general liability costs were highest for manufacturers of machinery, at $1.74 for every $1,000 of revenue. Non-nuclear utilities had the second highest ($1.59), followed by government entities ($1.45). Lowest general liability costs were found in insurance (4 cents), followed by transportation equipment (8 cents), and chemicals and pharmaceuticals (21 cents).

Transportation services companies had the highest auto liability costs per $1,000 of revenue, although at $1.61 their average costs dropped dramatically in 2005 from $5.84 for 2004. Educational and not-for-profit were the second highest category ($0.99). At the same time, transportation services firms' cost of $2,172 per vehicle ranked them highest among all industries, followed by educational and not-for-profit ($1,725) and construction ($1,684). Transportation equipment companies had the lowest cost per vehicle ($516), followed by telecommunications firms ($735) and insurance companies ($802).

Additional information and copies of Marsh's 140-page study, Casualty Cost of Risk 2006, can be obtained by contacting Curtis Williams by e-mail to