A Fresh Look at Insurance

Cutting insurance costs by overhauling insurance coverage.

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If you think your premiums are too high, it may be time for an overhaul

HBSA Industries Inc. was fed up with rising insurance costs. So when John J. Cirigliano became managing director and chief executive of this New York City-based manufacturer of department-store fixtures, he made insurance improvements one of his highest priorities. The decision has paid off. After a single year of overhauling HBSA's insurance coverage, Cirigliano has cut insurance costs by 20%, which is already saving the company more than $1 million a year.

Cirigliano didn't know much about insurance, other than that he hated paying premiums. He wasn't certain whether HBSA's insurance broker had been getting the company the best possible combination of pricing and coverage levels. So Cirigliano decided that he would go to an independent insurance consultant, Paul Gregory, for what is known in the trade as a conceptual.

Consultants like Gregory are different from insurance brokers. Because consultants are not in the business of selling policies or giving recommendations about specific insurers, they can provide a more unbiased perspective on a company's insurance needs. For fees that range from $3,000 to $10,000, they provide the insurance equivalent of a general physical examination, with the goal being to identify the protection limits and costs of a company's lines of coverage.

Gregory analyzed the premiums, claims records, insurance appraisals and adjustments, and coverage descriptions of all of HBSA's insurance policies. Since HBSA had always lacked the internal resources to monitor its insurance activities, the company's longtime insurance broker held most of those documents.

Gregory's conclusion was bleak. "This was a company that had stayed with one insurance broker for 40 years and just kept renewing its policies out of inertia," he says. "The kinds of coverage and policy options it had chosen didn't make sense anymore."

The conceptual pointed to three problem-ridden insurance areas for HBSA: workers' compensation, property-casualty coverage, and group health insurance. Using its conclusions as a guide, Cirigliano "held a beauty contest," as he calls it, for several brokers specializing in midsize corporate clients. "I wasn't just looking for lower prices, although that was certainly important. The conceptual pointed out how important it was that I get technical support from a broker on management issues such as improving worker safety." That was essential if the company ever hoped to get workers' comp costs under control.

Granted, at HBSA revenues are about $100 million and employees number 1,200, but all companies, no matter how large or small, can benefit by relying on a conceptual blueprint when cutting insurance costs. Here's how the conceptual has improved the bottom line at HBSA over the past year:

* Workers' compensation. Many executives assume there's little they can do about workers' comp costs. After all, it's the state regulators who decide how much each company should be charged for coverage based on how its past three years' worth of claims compare with statewide industry norms. But Gregory could see that workers' comp costs were hemorrhaging cash. Because the company's claims had been so high, states had assigned to HBSA premium fees that were 60% higher than its industry's norm. Worse still, the company's fees were due to rise to 90% higher than the norm because HBSA's claims record just kept getting more and more dismal.

HBSA, again using its conceptual as a guideline, decided to attack workers' comp costs from two directions. First it looked at job classifications, the state-assigned risk factors that determine premium pricing calculations for every job at every company. "Often companies don't bother to check to see if all their job classifications remain current and accurate," says Gregory. In fact, at one of HBSA's southwestern facilities, clerical workers had been incorrectly classified in a costly high-risk manufacturing category for years. "When we applied to the state for a reclassification based on a more accurate job description, we not only reduced our costs, we earned a retroactive refund," he says.

The second approach focused on what's known in the insurance industry as loss control, which means that HBSA looked for ways to reduce the frequency and severity of its workers' comp claims. Eugene Silvers, the insurance broker at Sedgwick James Group who had won Cirigliano's beauty contest, came in with a team to analyze HBSA's so-called loss runs. These are statistical comparisons of the cost and frequency of each type of claim and job activity. Eventually, Silvers's research translated into employee-safety workshops run by Sedgwick James employees, as well as some redesigned work processes. Because it's been able to control losses, HBSA expects to see significant decreases in its insurance premiums over the next several years.

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