A Midwest-based general contractor with multi-state offices and nationwide operations had a normal, industry-standard Guaranteed Cost workers’ compensation program with an annual premium of approximately $250,000. The client had worked closely with SilverStone Group’s Loss Control Team for nearly 10 years, resulting in an outstanding safety program and loss history. In an effort to help our client capitalize on their safety efforts and reduce their total cost of risk, we researched more effective ways to fund and manage this exposure.
We began by evaluating the loss history and premium bases. We then negotiated a loss-sensitive workers’ compensation program for the client in 2005. Although most insurance companies will not consider loss-sensitive programs for accounts that generate less than $500,000 of Guaranteed Cost workers’ compensation premium, SilverStone Group was able to negotiate a very attractive alternative for the client. Guaranteed Cost programs prepay the losses by including anticipated losses in the premium charged; this program enabled the client to pay loss costs as they occurred, thus gaining the use of the money until it was actually needed.
The client was offered a workers’ compensation program with a $100,000 per loss deductible. The premium for the Deductible program was $115,000 as compared to the $250,000 Guaranteed Cost program premium. The Deductible plan had an aggregate stop loss of $140,000 which capped out-of-pocket claim costs at that amount. In this plan, the client had virtually no downside risk, yet had the potential for significant savings. In addition, there were cash flow advantages tied to the lower premium and the loss funding mechanism.
As we reviewed this client’s program over the last two years, it was apparent that the decision to take the Deductible plan was wise. Premiums for the Guaranteed Cost program over the past two years would have been approximately $600,000, due to growth in payroll figures. Under the loss-sensitive Deductible plan, the client has paid out $365,000 to date (premiums plus losses paid plus expenses). The ultimate cost for the past two years is projected to be $440,000, based on current reserves.
The client took minimal risk to achieve significant premium savings. In addition, they were able to keep the money to pay claims in their balance sheet as working capital until it was needed, instead of letting the insurance company hold it. The cash flow advantages alone made this an effective approach to risk management; when the premium savings were added in, the advantages became substantial.
SilverStone Group’s partnership with this client, combining our innovation and expertise with excellent carrier relationships, resulted in significant cost savings. Clients depend on us for creative solutions, and we use wisdom at work to provide them.