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RIMS members meet with Argonaut.

Members of RIMS recently held a liaison meeting with executives from Argonaut Insurance Co. During the session, risk managers learned about the company and its views on lowering workers' compensation insurance costs, safety management and claims management. In addition, a substantial amount of time was spent discussing wrap-up insurance programs.

Argonaut, with $2 billion in assets, is a large-risk workers' compensation specialist licensed in all 50 states, Roger L. Moseley, senior vice president of field operations, told RIMS members. At year end 1989 the insurer's premium volume was $372 million, 78 percent workers' compensation, 14 percent general liability and 8 percent automobile liability. Approximately 80 percent of Argonaut's business is in accounts with annual premiums of $500,000 or more. These accounts represent the light manufacturing, service, wholesale/retail and construction industries, with more than half the business in construction or construction wrap-ups.

The company's earnings continue to be good, with $109.5 million reported in 1989 vs. $79.3 million and $67.5 million reported in 1988 and 1987, respectively. Its premium-to-surplus ratio remains below one-to-one. A.M. Best Co. has assigned to Argonaut an A rating.

Workers' Comp Premiums

Argonaut executives believe that employers want to know how to make their operations more profitable despite the workers' compensation environment. Monitoring and reducing insurance costs is a top management issue for employers, said Mr. Moseley. He mentioned three fundamental principles that can help employers improve their overall loss results: Large employers can pay their own losses, workers' compensation losses can be prevented and claims can be better managed.

Regardless of the rating mechanism, over time large employers tend to pay for their own losses. Thus, it is more important to decrease the loss component than the administrative component which is frequently pursued to lower insurance costs, said Mr. Moseley. With losses representing 70 percent to 80 percent of the total insurance dollar, this represents the best opportunity to lower these costs.

Argonaut challenges the generally accepted premise that workers' compensation losses are simply a cost of doing business resulting from fortuitous events. Effective safety management programs, supported by top management, can lower accident rates, and ultimately accident costs, said Mr. Moseley.

Rather than accept the consequences of injury in terms of benefit and medical payments, Argonaut believes claims should be aggressively managed. Here are several ways: Quickly identify the extent of the injury, provide appropriate medical care, facilitate early return to work and quickly resolve benefit levels to lower the cost of individual claims and improve employee relations within customers' operations.

Safety Management

Argonaut's safety management philosophy is simple. "Losses can be prevented only after each manager realizes that every accident is the result of a weakness or flaw in the management system. Management must accept responsibility for each loss and manage safety as diligently as any other company function," said Steven La Shier, vice president of safety management. "To accomplish this, accountability for safety must be established at all levels of management."

Modern safety management should not separate safety from production and profitability, he said. There can only be safe production or organizations will fail to realize their maximum profitability. While safety manuals, procedures and training are important, Argonaut's safety management efforts go further, establishing accountability and setting goals and measures for safety performance at all management levels. "The modern safety management professional should be viewed and used as a resource, not as a policeman or substitute teacher," said Mr. La Shier. "No injury is acceptable-that is the message management must send to its employees."

Claims Management

Proactive claims management focuses on communication between Argonaut and the buyer before, as well as after losses occur, explained William Wong, senior vice president of claims. This two-way communication includes before-the-fact risk identification; early establishment of communication goals that include the employee; implementing action programs, including rehab programs to return injured employees to work; and open lines of communication about losses to not only return workers to jobs as quickly as possible, but to analyze loss trends and find solutions to causes of injuries.

Insurance Program

Choosing the appropriate rating plan to quickly produce the lowest net cost is important, noted Thomas Tarpy, senior vice president of underwriting. While excellent safety programs will result in lower experience modifications over time, he said, other vehicles offer more immediate impact. Loss-responsive plans such as retros, deductibles and self-insured retentions (SIRs) should be carefully chosen to fit the specific needs of the insured. For the insured committed to cost control, guaranteed cost insurance is probably inappropriate because it best fits "average" risks. On the other hand, retros with high maximums will drive down the "hard" basic costs, while providing the greatest opportunity for premium savings resulting from safety management.

Other areas to explore, especially in liability areas, are large deductibles or significant SIRS. "The key is to select a deductible or SIR that essentially eliminates dollar swapping' with the insurer," said Mr. Tarpy. "The loss that is regular and predictable, plus some stretch' into the next layer of exposure, will yield the greatest cost savings. It also acts to encourage all operations and profit centers within the insured to operate at maximum safety levels."

Usually no single plan is appropriate. Combinations should be selected to maximize the opportunity for return premiums, dividends and excess premium savings while controlling the financial impact of catastrophic losses, noted Mr. Tarpy. Carrier selection is also important. "Do they know and want your business? Do they have the expertise to provide positive assistance to control losses and costs? Do they understand that ultimately it is your money?" he asked.

Construction Wrap-ups

A wrap-up is an owner, developer or contractor-controlled insurance program in which the sponsor purchases casualty insurance for all the contractors and subcontractors working on a particular construction project, such as a building complex, freeway, pipeline, utility or transportation system. Ordinarily, the contractors involved could not be combined for rating purposes because of the lack of common ownership. However, through the wrap-up approach, the sponsor can purchase all workers' compensation and general liability insurance for the construction project and realize significant cost and loss reductions,

Wrap-up programs consist of a variety of retrospective, participating and combined rating plans designed to meet the needs of most long-term construction projects. For construction projects costing more than $100 million, a wrap-up program is usually the most effective and cost-efficient casualty insurance vehicle, according to Ted Braucht, senior vice president of construction insurance. On a large construction project, general liability and workers' compensation insurance can account for as much as 6 percent to 8 percent of the total construction cost. By consolidating all casualty coverages in a wrap-up program, a sponsor can realize maximum control with minimum administration, said Mr. Braucht. The sponsor is assured that the workers' compensation and liability exposures on a project are properly and uniformly covered, without costly gaps or overlaps. Litigation costs that sometimes occur as a result of a multitude of insurance plans in a project are avoided. In addition, the administrative work is centralized, and resulting costs are minimized.

For clients with an ongoing construction program, Argonaut developed the Multi-Project Plan (MPP), which extends many of the benefits of a wrap-up beyond the single project. Whereas a typical wrap-up combines all unrelated contractors on a project into a single program, MPP combines unrelated projects under a master agreement for a single loss control and service program, said Mr. Braucht.

The MPP is underwritten for a sponsor of large-scale construction projects. Mr. Braucht said the advantages include the fact that administrative costs are contained by consolidating multiproject insurance needs into a single program which is centrally administered; a detailed analysis of multiproject losses is provided in a single report to facilitate the identification of problem areas; claims services for multisite activities are available through field offices to expedite handling; and because this plan can encompass many contractors and subcontractors involved in multiple projects, a customized safety management program is implemented, which often leads to reduced losses. In addition, Argonaut has a track record of substantially reducing the ultimate premium costs of wrap-ups by helping customers establish effective safety management and decrease their losses and of giving projects consistent coverage for most multistate locations.

The ideal candidate for Argonaut's MPP program is a single entity, an owner, contractor or developer, which has a common interest in all the projects and controls the insurance buying decisions, said Mr. Braucht. It should be involved in at least three projects with minimum construction costs of $20 million each and total project costs of at least $100 million within two to three years. It should also be firmly committed to achieving effective safety programs that deliver the benefits of a loss-sensitive program.

Large construction projects require a long-term relationship between the project sponsor, or project management group, and the insurance carrier that provides the wrap-up program, he said. Consequently, the insurer must make a significant commitment in terms of people and other resources to underwrite a multimillion dollar risk for an often lengthy period. An insurance company can only perform best if it and the sponsor of a wrapup program understand the complexities of large construction risks, he added. This means that the sponsor must work with the insurance company to develop firsthand knowledge of all facets of the operation. The successful wrap-up program is dependent on the insured's commitment to the diligent management of the safety aspects of a project. The sponsor must support the insurer in the ongoing monitoring of established safety programs and be willing and able to quickly effect any required safety program improvements.
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Title Annotation:includes related information; Argonaut Insurance Co.
Publication:Risk Management
Date:Jul 1, 1990
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