Rising Premiums Remain Problematic
Alternative strategies that may boost your bottom line
Insurance rates for businesses, especially for material handling companies, continue to skyrocket. This is not a news flash to most business owners, but that doesn't mean the solutions to the problem are as obvious. In a recent survey by the National Federation of Independent Business, the cost of insurance was named as the biggest concern in 2004 by more companies—28 percent—than anything else.
MHEDA members are already feeling the effects. Dave Koestner, president of K-Lift Material Handling Equipment Company (Kalamazoo, MI), says that his premiums for general liability and workers' compensation insurance went up by a stunning 160% this year. Not only that, but his previous carrier had dropped him because he was a forklift dealer, and he contacted three more people who refused to give him quotes before finding his current provider. A 35% premium increase at Southwest Material Handling Company (Dallas, TX) was enough to force its president, Joe Harper, to search for a better deal. He finally found one by shopping for carriers out of state. Surely, these are not the only examples, but what is causing the rates to increase so dramatically, even for companies that don't have a history of high claims?
Uncovering the Answers
One reason for the high rates is a lower global capacity for insurance. According to John Graham, CEO of Fairview Insurance Agency, the World Trade Center since 9/11 has eaten up nearly half of the world's insurance reserve funds. “There has been some redemption of funds to help the carriers with that situation, but there are two things companies could do: Lose their businesses or increase premiums and try to make an underwriting profit,” he says. Therefore, insurance providers are tightening up their offerings.
Increased competition, the unstable stock market and rising claim payouts all are contributing factors forcing insurance providers to raise rates. Insurance companies want accounts to be profitable when they underwrite them, forcing them to examine the risk of payout. Companies with adverse loss experience understandably will be charged exorbitant rates or denied altogether.
Unfortunately, though, even firms with no history of claims are facing price hikes. “The reason premiums are going up so high is because there have been a lot of lawsuits in the industry and a lot of payouts on those claims, especially when it comes to forklifts,” Graham says. “There's a lot that goes into it, including the type of product, the type of line, the potential for malfunction in the line and how adept the mechanics are at maintaining the equipment.”
All of these things can affect premiums in different ways, and the rash of litigation in the area adds to the problem. “If a dealer gets sued, they go to court and may end up settling for $10,000. The dealer will only see the $10,000 on that claim, but the legal fees to try to mitigate the claim for the insurance company run closer to $100,000. If an insurer pays two of those a year, that's more than the premiums they get for all the insurance they write. It's a loss-sensitive type of scenario in underwriting a material handling firm. Everybody's looking to pass the blame onto somebody else.”
Ways to Reduce Costs
Graham says that companies can help curtail rising rates by paying extra attention to safety. “It comes down to how you manage your business and how safety conscious you are in taking all the proper steps to train your mechanics and document paperwork. Every time you perform a service, it should be documented and signed off by the client,” he says. “You shouldn't just take in a piece of equipment and ship it to another place. The client has to know that there is nothing wrong with that piece of equipment, so it should be checked out, modified and approved that the maintenance has been completed. That's very hard to ask, but to mitigate those claims, that's what it comes down to,” he says.
Another approach is to try to make the person who rents the equipment share in the responsibility if there is a problem. “Asking the lessees to come back and cover the dealer under their policy is a way of transferring some of the risk and the loss of that equipment onto the lessees, making them responsible for their actions on that piece of equipment. That helps reduce your insurance costs through a contract.”
Health Care: The Facts
Adding to the problem of general liability insurance is the high cost of health insurance and benefits. Monthly health insurance premiums rose 13.9% from 2002 to 2003, the third consecutive year of double-digit premium increases and the highest premium increase since 1990, according to the 2003 Survey of Employer Sponsored Health Benefits by the Kaiser Family Foundation and the Health Research and Educational Trust. Despite the hefty increases, 66% of all firms offered health coverage to their workers in 2003, but the rising costs did induce 62% of companies to shop for a new plan, and 33% changed health plan types or insurance carriers. According to the survey, “The high rate of premium growth in 2003 appears to have been driven by a combination of rapid inflation in the costs for health care and insurers' efforts to emphasize profitability in their pricing,” bearing out Graham's point above.
Alternatives to Standard Plans
To combat these high premiums, the strategy for many companies is to simply increase the amount employees contribute toward premiums and increase co-pays and deductibles. More specifically, some companies are increasing the amounts employees must pay for less-serious conditions like allergy or hair loss treatments. Others are comparing benefits to their competition to see what their own benefits package needs to include to avert high costs and still attract qualified talent. There are also options completely separate from fully insured plans, such as those below.
Self-Insurance
One increasingly popular option for employers is self-insurance, where employers pay for each claim as it is incurred, instead of paying a fixed premium to an insurance carrier. Self-insurance was once thought to be possible only for larger companies with substantial cash flow, but according to a recent article in The Wall Street Journal, more small and mid-size companies are switching to such plans. “With self-insurance, smaller companies set aside an amount for routine health claims, purchase special insurance for catastrophic or unusual losses, and typically hire a third party to handle the administrative details,” the article states.
Two main benefits of self-funded plans are the ability to customize according to specific employee needs and no prepayment. According to the Employee Retirement Income Security Act, self-insurance is considered an employee benefit plan instead of an insurance contract, sparing companies from state premium taxes. On the other hand, self-insurance does have its drawbacks. For example, claim costs will likely fluctuate from year-to-year, variations that would normally be absorbed by the insurer. Also, companies need to purchase additional “stop-loss” insurance to cover claims over a specified dollar amount, and one or two catastrophic claims could quickly cause problems for a self-insured firm. For more information on self-insurance plans, visit the Self-Insurance Institute of America at www.siia.org.
Health Savings Accounts
In December 2003, as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, Health Savings Accounts became a reasonable option for health care. Employers can contribute on behalf of employees, like a 401k, which may be an alternative for companies stuck paying huge premiums. These accounts are set up with pretax income, and withdrawals used for health care are tax-free. The money in these accounts gets rolled over each year, permitting low-risk individuals to accrue a hefty sum. However, these plans require employees to be enrolled in a health plan with a high deductible and a high out-of-pocket maximum. Another drawback is any withdrawal not used for health care comes with penalties and taxes. Read more about health savings accounts in the next article and by following one of the links at www.aahp.org.
Other Options
Small businesses should keep abreast of the controversial Small Business Health Fairness Act, legislation exempting Association Health Plans (AHPs) from state insurance regulations, a move that could allow AHPs to proliferate. In his 2004 State of the Union address, President Bush urged Congress to pass AHPs. “Small businesses should be able to band together and negotiate for lower insurance rates so they can cover more workers with health insurance.” As of press time, this legislation had stalled, but it is definitely something to keep an eye on. Essentially, AHPs offer small businesses the opportunity to join together through trade and professional associations to collectively purchase health benefits at lower rates than they are typically offered individually. However, some argue that these plans, in the absence of state regulations, would encourage price-gouging on high-risk candidates.
The best way to rein in rising premiums on all types of insurance is still the old-fashioned way: do your homework. It is essential that businesses research their options and find the best plans to fit the needs of the company. Remember, cheaper is not always better.
How to Protect your Employees When Purchasing Health Insurance
Compare coverage and costs. Always compare the benefits and costs of multiple insurance products. If one product appears to offer similar benefits at a dramatically lower cost, ask questions.
Perform background checks. Confirm that the person offering the product is a licensed insurance agent with a proven record of reliability. Promoters of insurance scams often engage unlicensed insurance agents to market their product as a cheaper alternative to traditional insurance. Check out unknown agents with your state insurance department. Verify that any unfamiliar company, organization or product is approved by your state insurance department.
Examine the policy. Determine the actual coverage and whether the promised benefits are fully insured by a licensed insurance company. Do not confuse representations about stop-loss coverage with a guarantee of group health benefits. Stop-loss coverage often protects only the issuer, not the insured individuals.
Request references. Request references of employers enrolled with the provider and get information from employers about benefit payment history and claim turn around time.
Ask about the allocation of premiums. Allocation of a high percentage of the premiums to commissions, fees and administrative expenses may indicate a problem with the product or insurer.
Report problems. Contact your Regional Office of the Employee Benefits Security Administration (U. S. Department of Labor) through its toll-free number at 1-866-444-EBSA or at www.askebsa.dol.gov to report problems.
(Source: www.dol.gov/ebsa/Newsroom/ltrhealthinsurancetips.html) |
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