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Premium price: rising workmen's compensation costs nail contractors.

Workmen's compensation insurance is considered the least profitable line of business for carriers.

It also generates the highest administrative costs for insurers.

This combination is forcing construction companies to pay a high cost for coverage -- if coverage can be found.

During the past five years, workmen's compensation rates have increased 72.3 percent. Annual double-digit increases are nailing contractors in the bottom line, and they're not happy about it.

"The rising cost of workers' comp insurance is the most dangerous problem facing the construction industry," says Tommy Fish, executive director of the Arkansas chapter of Associated General Contractors of America Inc. "At the next regular session of the Legislature, there needs to be some attention paid to workers' comp. There has to be some relief."

The problem is tied to escalating medical costs. Government-imposed ceilings on Medicare and Medicaid payments have reduced federal expenditures but forced the health care industry to shift the burden to the private sector.

In turn, the price of workmen's compensation claims has risen, leading to higher insurance premiums.

Contracting companies attempt to pass the cost increases to developers during the bidding process. But competition sometimes forces construction companies to pay for increases or risk losing bids.

The money comes off the bottom line.

That has led to efforts to contain the cost of workmen's compensation insurance through fee schedules. The effort is on a collision course with a labor-backed proposal to improve workmen's compensation benefits in Arkansas. Opponents claim the labor initiative would raise insurance rates by 30 to 35 percent. Supporters counter that the package might not affect premiums at all.

When it comes to workmen's compensation costs, Arkansas ranked as the fifth-worst state during policy year 1990, according to the National Council for Compensation Insurance at Boca Raton, Fla. Insurance companies paid out $1.42 in the form of administrative costs and claims for every $1 in premiums collected from Arkansas employers.

Only Maine (undefined), Rhode Island (-270.6 percent), Louisiana (-125.3 percent) and Massachusetts (-44.1 percent) had worse showings.

The 42.1 percent loss in Arkansas can be attributed to the state's assigned risk plan. The pool is a last resort for companies labeled as bad insurance risks or firms that simply cannot find workmen's compensation insurance on the open market.

When claims exceed premiums for a given year, the state does not have to shoulder the losses from the assigned risk plan.

Neither do members of the pool.

The tab is picked up on a pro rata basis by all insurance companies that offer workmen's compensation coverage. Net operating losses from workmen's compensation insurance came to $64.84 million in Arkansas during policy year 1990.

Some insurers are complaining to state officials while raising premiums on their customers.

Other insurance companies have grown so disgusted with the workmen's compensation market in Arkansas that they have quit offering policies in the state.

When Aetna Life & Casualty Co. pulled out of the market, it left former clients such as Crown Millwork of Little Rock in a bind. Crown, an affiliate of May Construction Co., scrambled to find another insurance carrier to avoid being thrown into the state's assigned risk pool. The company could find only one underwriter willing to quote workmen's compensation rates.

That's a telling statistic given Crown's track record.

The firm, which has 12 employees, has had less than $3,500 in workmen's compensation claims since it began business in 1984.

"If a little company like that with a great safety record has trouble finding workers' comp insurance, look what can happen with the big companies," says Jim May, chairman of May Construction. "In Arkansas, we have higher premiums and lower benefits, and that's not good for employers or employees."

Restoring Balance

The state Insurance Department is trying to do something to correct the imbalance caused by the assigned risk plan. Effective Feb. 1, members of the plan were assessed a 25 percent rate increase.

And there's a pending rate filing by NCCI asking for an additional 30 percent increase for both the voluntary market and the assigned risk plan.

Employers could have been looking at a 60 percent increase in premiums if the state had not imposed the 25 percent increase on its program.

All of this comes on the heels of a 15 percent increase in workmen's compensation rates last year.

"The premiums are a big-cost item in our jobs," says Bob Shell, president of Baldwin & Shell Construction Co. of Little Rock.

Insurance rates vary with job sites and types of work. Excavation work is more dangerous than concrete work, for example. Accordingly, coverage is more expensive for excavation employees.

The closer medical facilities are to a job site, the better the rate. Premiums also are affected by the level of care offered at area hospitals.

To help contain insurance costs, Baldwin & Shell began a safety program in the early 1960s, one of the first in the state. The program is a major factor in the company's ability to buy insurance on the open market.

But more construction companies, especially smaller ones, are finding it almost impossible to purchase workmen's compensation coverage. The options are to shut down or join the state's assigned risk pool.

AGC is considering reinstituting a self-insurance program after a five-year hiatus.

The state is taking steps in addition to rate increases. Beginning April 1, insurance companies will receive a $1.50 credit for every $1 in premiums TABULAR DATA OMITTED removed from the assigned risk pool. The incentive will encourage insurers to rescue less risky companies from the pool.

In addition to rising medical costs, the number of workmen's compensation claims has increased.

Are greedy lawyers to blame for the trend?

"That's not the case in Arkansas," says Ron Lensing, executive vice president of the Little Rock insurance firm Ramsey Krug Farrell & Lensing Inc. "The insurance companies bash lawyers on other issues, but not on workers' comp."

Some insurers believe the recession has prompted certain contractors to cut corners.

Construction companies, meanwhile, say they are improving safety programs.

"We don't see that translating into fewer accidents," Lensing says. "Arkansas is accused of having a worse safety record than other states."

That likely will change as insurance companies reward safety-conscious firms with lower premiums and dish out higher rates to contractors that don't reduce the number of claims.

The future of the entire construction industry could be at stake.

Putting It To A Vote

Unions, Contractors Square Off Over Workmen's Compensation

Battle lines are forming over proposed changes in the Arkansas Workers' Compensation Act.

Supporters recently began a petition drive to place the issue on the November ballot.

The initiative has drawn sharp criticism from organizations such as the Arkansas chapter of Associated General Contractors of America Inc. and the Arkansas State Chamber of Commerce.

"The business community must defeat it," says Ron Russell, executive vice president of the State Chamber of Commerce. "It is imperative that labor not succeed in this initiative. If it passes, it will destroy Arkansas' ability to attract new businesses and industries and severely damage the ability of existing Arkansas businesses and industries to compete."

"The state chamber has dusted off the same tired propaganda and scare tactics they used against our 1968 proposal," counters Jim Clark, secretary-treasurer of the Arkansas AFL-CIO. "The voters approved 19 changes in the workers' comp law then, and we didn't drive industry out of the state."

The battle of words is only beginning.

The chamber is trying to raise $1.5 million to fight the initiative.

"The chamber is going to turn heaven and earth to try and beat it, just like it always does," says Little Rock attorney Bud Whetstone. "It is almost a religious matter with them to make sure workers don't have enough benefits to take care of themselves if they get hurt."

Will the proposal raise workmen's compensation insurance rates?

According to "conservative estimates" by the chamber, premiums would increase by 35 to 38 percent if the proposed changes were made.

According to the AFL-CIO, the changes likely would have little or no impact on insurance rates.

Bob Harrelson of Maumelle believes the real battle is between insurance companies and lawyers. Harrelson, 50, is former director of marketing for Kinco Inc. at Little Rock and was executive director of Associated Builders and Contractors of Arkansas Inc. from 1976-80.

Two years ago, he was injured returning from a sales call while working for Kinco. A rear tire blew out on his car while traveling on Interstate 430. Harrelson had a ruptured disk removed, but the muscle damage and pain remained.

"I have no complaints against Kinco," he says. "But the whole situation with the insurance company was confrontational and demeaning."

Harrelson is still having problems getting reimbursed for medication. One of the proposed changes in the workmen's compensation law would require insurers to live up to their obligations.

However, the issue of improved benefits is controversial because contractors are sensitive about insurance rates and angry over instances of insurance fraud.

Meanwhile, supporters continue gathering signatures to put the matter to a vote in November.
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Raising Steel, part 2; includes related articles
Author:Waldon, George
Publication:Arkansas Business
Article Type:Industry Overview
Date:Mar 29, 1992
Words:1515
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