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Guide to FHWA Funded Wrap-Up Projects

VII. The Insurance Market

  1. Market Influences

    Market influences. Arrows into market place (soft market to hard market) are interest rates, capacity, loss ratio, catastrophic events.When considering a wrap-up, one of the most important trends to consider is the state of the insurance market. The number of carriers qualified and willing to underwrite wrap-ups has increased dramatically over the past 25 years resulting in a very competitive marketplace. One of the important results has been the virtual elimination of "upside" risk associated with wrap-ups (see how premium is developed).

    Since 2000, the insurance marketplace has been undergoing a transition with costs increasing and availability diminishing. This resulted in cost increases of 20 percent to 50 percent to correct the under-pricing of previous years.

  2. Emerging Claim Challenges
    1. Expanded Asbestos
    2. S&A Environmental
    3. Lead Paint
    4. Construction Defects
    5. Synthetic Stucco
    6. Pharmaceuticals
    7. Class Actions
    8. Tobacco
    9. Mold and Mildew
    10. Cell Phones
    11. Nursing Homes
    12. Tires
    13. Fuel Additive (MTBE)
    14. Ohio UM/UIM
    15. Internet-derived Exposures

    The market was affected by the events of September 11, 2001, with the potential for losses in excess of $70 billion. The reinsurance (secondary market) has virtually eliminated any coverage for terrorism. Primary insurers cannot eliminate coverage without state approval and terrorism cannot be excluded from workers' compensation policies. The resultant dramatic market "hardening" characterized by substantial premium increases, coverage restrictions and available limits has been felt across all lines of coverage and all businesses.

  3. Transitioning to a Hard Market
    1. Year 2000 Combined Loss Ratio - 110.1%
    2. Year 2001 Projected Results - 119.9%
    3. Year 2001 Commercial Lines Projected - 130.0%
    4. Shareholder pressures to produce underwriting profits
    5. Continued pressure to maximize investment income
    6. Reinsurance consolidation and tightening
    7. Retail insurance carriers out of business or downgraded

    In addition, the financial strength of many insurers and reinsurers is now an issue with many rating agencies downgrading companies and the number of insolvencies increasing. Insurance companies have upgraded the qualification for evaluating reinsurers in what has been called a "flight to quality". This reduces the number of available reinsurers and ultimately translates to higher prices.

    The reduced capacity (availability of limits), coverage restrictions, cost increases and financial strength of insurer are affecting all contractors in varying degrees. This market instability translating in higher construction costs and lack of consistency are even more compelling reasons for an owner to exercise control of the insurance program.

    While it is true that these issues also affect the markets writing wrap-ups, these programs historically have produced more profitable business than "un-wrapped" construction accounts. A survey of the top five wrap-up insurance markets and found that they are continuing to offer wrap-up programs. Overall costs may be affected by each individual carrier's reinsurance costs as well as the carrier's overall profitability and the profitability of their construction and wrap-up accounts.

  4. Feasibility Studies

    The feasibility study is used to determine if the project qualifies for wrap-up consideration. A feasibility study is a cost/benefit analysis comparing the cost of contractor provided insurance to the cost of an owner controlled insurance program. The study also considers non-financial considerations such as the workers' compensation jurisdiction, rules governing the use of wrap-ups, the type of project and other factors that could influence the potential for cost savings. The feasibility study may be developed by an independent consultant or by a broker. The consultant will charge a fee, but has no interest in the results. The broker may include the cost of the study in its fee to market and administer any subsequent program.

    The preliminary cost evaluation generally is provided by a consultant, the chosen broker, or as part of the RFP response from all brokers. At this early stage, the cost projections are based on the estimated hard costs, broken down by trade specialty (if available). These costs are used to project the unburdened payroll by trade, which are organized by workers' compensation class codes.

    Feasibility studies are used by owners to determine the viability of a wrap-up for their projects. Insurers will require feasibility study information and additional information (e.g., hard and soft costs, projected payroll by trade, term-of-project, relevant experience of prime contractor, type of construction) to determine coverage specifics, including premiums, minimum deductibles, safety program requirements and maximum payouts for claims (i.e., annual aggregates).

    Step - 1 Developing Payroll Estimates and WC Premiums
    Residential High Rise
    Construction Hard Costs 85,000,000
    Work CategoryBreakdownTotal ValueLabor %Derivative PayrollWC CodeRatesEst. Standard Premium
    General ConditionsGeneral/Extended Conditions4,620,00060.0%2,772,00056064.76131,947
    Material/Personnel Hoists990,00020.0%198,000521333.0265,380
    SiteworkMass Excavation200,00025.0%50,000621714.277,135
    Excavation & Backfill150,00025.0%37,500621714.275,351
    Import Fills/Export Spoils20,00025.0%5,000621714.27714
    Soil Treatment10,00020.0%2,000622912.72254
    Drainage Wells125,00020.0%25,000622912.723,180
    Irrigation System35,00020.0%7,000622912.72890
    Seawall Improvements175,00020.0%35,000521333.0211,557
    Precast Well Structures60,00030.0%18,000521333.025,944
    Pavement Striping30,00020.0%6,000550616.46988
    Curbs, Gutters75,00020.0%15,000550616.462,469
    Precast Interlocking Pavers175,00020.0%35,000550616.465,761
    Cast Keystone20000020.0%40,000004217.306,920
    Concrete Materials/Pumping4,050,00020.0%810,000522115.37124,497
    Reinforcing Steel/Tensioning3,725,00020.0%745,000521333.02245,999
    Concrete NOC740,00020.0%148,000521333.0248,870
    MetalsStructural Steel125000022.5%281,250504051.50144,844
    Space Frame (Sheet Metal)35000022.5%78,750553816.8913,301
    MasonryExterior/Interior Unit Masonry1,290,00025.0%322,500521333.02106,490
    Step 2 - Development of Contractor's Insurance Costs and Estimated OCIP Cost Components
    Contractor & OCIP Cost Development
    Workers' Compensation
     Contractor Cost  OCIP Cost
    WC Standard Premium3,214,559 WC Standard Premium3,214,559
    Coverage B0.033 Coverage B0.033
    Cov B Premium106,080 Cov B Premium106,080
    Total Standard Premium3,320,639 Total Standard Premium3,320,639
    Est. Experience Mod0.90 Est. Experience Mod0.90
    Modified Premium2,988,575 Modified Premium2,988,575
    Premium Discount %8.50%   
    Discounted Premium2,734,546   
    Expense Constants5,000   
    Fee + 5%136,977   
       Deductible Factor0.85
    WC - Total Premium2,876,524 Deductible Credit2,540,289
       WC - Deductible Premium448,286
    General Liability
     Contractor Cost  OCIP Cost
    Estimated Premium958,841   
    Fee + 5%47,942   
    GL - Total Premium1,006,783 GL - Deductible Premium352,374
    Total WC/GL Premium3,883,307 Total Deductible Premium800,660
    Umbrella Liability
    Limit: $5 to $10 MillionContractor Cost Limit: $25 MillionOCIP Cost
    Minimal Estimate75,000   
    Fee+ 5%3,750   
    Umbrella Total78,750 Premium350,000
       Brokerage & Admin220,000
    TOTAL3,962,057 TOTAL Expenses1,370,660
      See OCIP @ Expected Losses for Total Cost

    The applicable workers' compensation rates are applied and a cost for general liability is added. With the addition of a loading for the contractors' profit, administration and contingency costs this represents the estimated cost of contractor provided insurance. Then, based on current market results (benchmarking) the wrap-up costs are estimated and compared to the contractor's cost.The evaluation of potential savings (and upside risk) is determined by using an estimate of projected losses for the project and a projection of the aggregate amount of losses to be used in determining the wrap-up premium (see how premium is developed).

    Step 3 - Preliminary Projection: Savings vs. Risk
    OCIP "Expected" Cost
     Loss Ratio %Losses
    A. Losses  
    Workers' Compensation40%1,095,818
    General Liability10%95,884
    Total 1,191,703
    B. Adjustment Expense8.00%95,336
    Total 95,336
    C. Deductible Premium 800,660
    Primary WC/GL Total (A+B+C) 2,087,699
    Brokerage 220,000
    Umbrella 350,000
    Contractor Deduct @ 90% 3,565,851
    SAVINGS 908,152
    OCIP "Maximum" Cost
     Loss Ratio %Losses
    A. Losses  
    Workers' Compensation68%1,849,194
    General Liability20%191,768
    Total 2,040,962
    B. Adjustment Expense8.00%163,277
    Total 163,277
    C. Deductible Premium 800,660
    Primary WC/GL Total (A+B+C) 3,004,899
    Brokerage 220,000
    Umbrella 350,000
    Contractor Deduct @ 90% 3,565,851
    RISK (9,048)
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Jerry Yakowenko
Office of Program Administration
E-mail Jerry

Updated: 04/07/2011

United States Department of Transportation - Federal Highway Administration