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.

Cirigliano also encouraged his managers to consult Sedgwick James when they had questions about insurance matters. "My managers probably call them three or four times a week," he says. "There's no cost involved, and it often results in real savings for us."

* Property-casualty coverage. For HBSA, as for most other companies, it was tough to keep track of the property-casualty end of its insurance coverage, given the wild fluctuations in prices and product availability that have rocked the marketplace over the past decade. HBSA's executives had easily slipped into a pattern of simply renewing whatever coverage they had bought in the past, as long as their broker continued to sell it.

But HBSA's conceptual revealed some costly blunders -- among them, the continuation of flood-insurance coverage for a manufacturing facility the company had stopped leasing two years earlier. Cirigliano was flabbergasted. The tens of thousands of dollars spent on unnecessary insurance aside, the useless flood policy was a grim reminder of how incapable his own managers were of tracking the intricate details of all the different kinds of policies the company needed to buy each year.

"I realized how important the conceptual had been," he recalls. "I'm not an insurance expert, and I just don't have the resources right now to devote to the kind of internal monitoring we need." With some input from Silvers, Cirigliano eventually decided not only to phase out the outdated policy but also to organize all of the company's various flood insurance under a single, cheaper umbrella policy.

Bringing HBSA's property-casualty coverage up-to-date took other forms as well. With 13 different production sites, keeping insurance appraisals current for each site's machinery and inventory had proved difficult and costly in the past. So Cirigliano decided to switch to what's known as a blanket loss policy, which pegs loss limits at the value of the entire company. That might sound expensive, but in fact, since there's virtually no risk that all 13 sites will be damaged simultaneously, premiums remain affordable.

Then, following a recommendation from the conceptual, Cirigliano added a 5% annual cost-of-living increase to the loss limit to eliminate the need for yearly appraisals. "If we enter a period of intensive growth, we can either raise that figure or start doing some appraisals at that point," he says.

* Group health coverage. The conceptual had provided Cirigliano with one bright piece of news: the company's medical-insurance problems would be relatively simple to correct if it was willing to cut back its generous health benefits.

"We had always paid for 100% coverage for our employees, even though no one else in our industry did," he says. As health-care costs rose, that became an indulgence the company could no longer afford. As the conceptual had recommended, HBSA set up a coinsurance scheme requiring employees to pay a $250 deductible as well as 20% of the price of their annual premium, the way the company's competitors did. "That reduced costs in several ways," says Silvers, "including the fact that the company wound up cutting coverage entirely for several hundred employees who were covered by their spouses' insurance, because they didn't want to pay the coinsurance."

On Gregory's advice, the company will probably update its conceptual every three years. Next time, with HBSA's insurance emergency abated, Cirigliano plans to schedule his conceptual for three to six months before the insurance policies come up for renewal, which will give him plenty of time to evaluate any changes that might seem warranted.

In the meantime, the chief executive comments happily, "I think we're about 80% of the way toward making our insurance cost-effective." Although some of the savings has come from cutbacks in insurance coverage, he notes, "we've already saved so much money that we can actually afford to start thinking about ways to broaden our benefits, maybe by adding disability coverage or a 401(k) plan."


Start with regular reports

For a chief executive, monitoring insurance costs is as important as tracking cash flow and product sales. Here's how to do it:

* Circulate loss runs. Ask your insurance broker to file biweekly or monthly reports listing by size, type, and location every insurance claim that your company has filed. Then circulate the information to key managers.

* Schedule quarterly reviews. Every three months meet with your insurance broker and human resources director to analyze trends, comparing the latest quarter's performance with both the previous quarter's and the previous year's. If workers' compensation claims seem unusually high at one of your company's manufacturing sites, for example, you may want to schedule some additional safety-training workshops for the people who work there.

* Look for warning signs. Ask your broker to provide policy-renewal estimates, based on your current year's loss runs, at least three months before each type of policy expires. That will give you plenty of time to explore alternatives if cost overruns seem likely.