Guide to FHWA Funded Wrap-Up Projects

X. Insurance Carriers

1. Insurance Carriers

   Insurance companies fall into a number of categories or classifications. Wrap-ups may use the services of various segments or categories of the insurance market. The following chart identifies the type of markets used for various coverages:

   Coverage	Type of Insurer	Comment
   Basic Wrap-up: Workers' Compensation Commercial General Liability Excess Liability Builder's risk	Admitted (licensed) Insurance Company, providing primary coverage	Required to write Workers' Compensation in all states except Louisiana Primary carriers have the service infrastructure to offer necessary audit, safety and claims services
   Stand-Alone General Liability Airport Construction Liability Policy Excess Liability Pollution Liability Professional Liability Builder's risk	Admitted Carrier Non-Admitted Carrier approved for Surplus Lines Use Alien or Foreign Carrier such as Lloyd's of London Syndicates	Limited administration is required - a single policy is issued for the project (except Texas, which requires a separate GL policy for each contractor Non-Admitted Carriers that are approved Excess and Surplus Lines markets may offer more competitive terms and conditions because they are not subject to certain state regulations requiring approval of rates and forms. These carriers require an additional charge for surplus lines tax and in the event of carrier insolvency, the state guarantee funds do not apply. (Admitted carriers include the state tax within the premium, which is deposited into the state fund.) Lloyd's and other international markets are used on airport and other unusual risks or capacity needs. Tax and insolvency issues are the same as in item #2

2. Ratings

   The first consideration in choosing a wrap-up insurance carrier should be the financial strength of the company. There are a number of organizations that rate companies financial strength, management, and claims paying ability including:

   1. A.M. Best
   2. Stand & Poor's
   3. Moody's
   4. Federal Treasury List

   Many owners and brokers have minimum standards for insurers, requiring an AM Best Rating of A- VI or above (and the equivalent for Lloyd's of London syndicates).

3. Insurer Response Evaluation

   Evaluating insurer responses should be based on a methodology that compares insurance company offers and determining the best value (combination of coverage, of service and cost). It is the broker's responsibility to assist the owner in establishing criteria for evaluation and selection as well as performing the necessary analysis and comparison of costs, cash flow, coverage, services and other relevant program components.

4. Evaluation Criteria

   Some owners identify specific criteria and the relative weighting of those criteria. Publicizing the criteria may lock in a choice without consideration for other factors or without the flexibility to address changing priorities. Whether included in the Underwriting Submission, or used and published after the fact, the criteria should measure the responsiveness to the owner's objectives. It is clear that the choice cannot be based solely on cost.

5. Written Proposal - Non-Cost Criteria
   1. Financial Rating
   2. Wrap-up Experience - number written within past five years, number currently insured
   3. References
   4. Response to Coverage Specifications
   5. Response to Service Specifications
   6. Objective and Subjective Assessment of the proposed team's experience, workload and service plan
6. Evaluation Forms

   Forms should be designed by the broker (or owner's standard form should be adapted) and submitted to the owner for review and approval. In addition to addressing the summary categories of the evaluation, detailed analysis of all program components is performed by the broker.

   Criteria or Component

   Carrier's Response: Agreed - Meets Requirement Exceeds - Specify Alternative - See Comments Not Responsive

   Weighting: Importance

   Points: an be one-to-five ranking or more detailed

   Comments Explanatory Information

   The evaluation would total the weighted points - this preliminary evaluation would be discussed and reviewed with the Owner's Selection Committee and subject to finalization.

   Some owner's identify certain criteria as eliminators - regardless of how the rest of the program points. Common eliminators include:

   1. Financial rating below a specific rating
   2. A specific coverage issue (for example, an attempt to exclude injury or illness resulting from exposure to radioactive material when quoting a wrap-up for a Nuclear Power Plant)
   3. Unwillingness to provide full-time on-site safety personnel (if requested)
   4. Unwillingness to consult or seek authority for settlement of losses over a certain dollar amount
7. Written Proposal - Program Cost

   The program cost is the total premium, including losses and other related charges. Each program may contain some or all of the same components or charges. Deductibles and aggregate retentions (the maximum amount of losses that may be charged to the program regardless of actual loss experience) can vary. Because the programs are being evaluated prior to the project inception, the cost of each program at various loss levels up to the maximum cost is compared. The evaluation focuses on the cost of the program at the projected loss level and the maximum cost of the program. The following are typical cost comparison evaluation worksheets:

   In addition to a summary of the key components (based on the owner's objectives, issues and concerns), the following worksheets are representative of the detail review:

   Summary - Key Components

   COMPONENT	Carrier 1	Carrier 2	Carrier 3
   Loss Limit/Ded	250,000	250,000	225,000
   Hard Dollars	377,486	593,618	537,940
   Cost of Losses - %	7.00%	7.00%	7.00%
   Cost at Expected	107,250	82,250	80,500
   Per Loss Cost Cap	No	No	7,000
   Cost at Expected	1,659,736	1,850,868	1,768,440
   Maximum Cost	2,516,769	2,750,143	2,656,755
   Cost of Managed Care	25% of Savings	??% of Savings	18% of Savings
   Buy-Out Option	No	Yes	No
   Other Enhancements or
   Restrictions

   1. Expenses: the costs for risk transfer (insurance), carrier services and other non-variable charges (not directly related to losses). These costs developed either as a percentage of workers' compensation premium (using bureau-published rates for each category of payroll) or more typically as a composite rate based on total project payroll. The "premium" is estimated at program inception based on estimated payrolls and adjusted based on the actual audited payroll.
   2. Cost of Losses: the charge for adjusting and administering claim payments. This is a variable cost directly related to either the value of the loss (charged on a percent basis) or the number of losses (charged on a per claim basis). In addition to the loss adjustment costs, the carrier also provides cost containment or managed care services designed to reduce medical provider charges. This cost is developed as a percentage of the medical fee savings.
   3. Minimum and Maximum Costs: The minimum charge is the cost of the program at zero losses and is typically equal to the Program Expenses (see #1). The maximum is a worst case scenario - and represents the program cost using the highest amount of losses allowable based on the pre-determined cap (aggregate or maximum).
   4. Payment Terms: the method for payment of expenses, reimbursement of actual losses and collateral or security requirements where certain payments or costs are deferred. These deferred amounts are generally related to loss reimbursement where the reserve amount (for payments to be made in the future) is not required to be reimbursed until actual payment is made. The liability associated with the reserve is secured by collateral (usually a letter of credit or surety bond) in lieu of premium payment.
   5. Program Cost at Various Loss Levels: The projected cost of each program, based on adjusting the variable costs to reflect multiple scenarios.
8. Oral Presentation

   The second part of the carrier selection process is the oral presentation. Carriers are invited to discuss their services, introduce the service team and respond to questions from the selection committee members.

9. Format

   This portion of the selection process usually carries less weight - up to twenty-five percent (25%) of the total points. Most owners' do not invite all offerors. The results of the written evaluation are used to narrow the potential options. Many owners prefer that only the top three carriers participate. The broker may recommend expanding this list if the written evaluations produce very close results or if the offers present unique components. The participants are invited to make a presentation with specific time limits. Most owners identify the topics to be addressed and may incorporate specific questions in the invitation. Among the topics included:

   1. Introduction of the Service Team
   2. Explanation of how the carrier can assure effective implementation
   3. Discussion of the carrier's risk control service and highlight success stories on other wrap-ups
   4. Presentation of why the carrier's representatives think their company should be chosen
   5. Demonstration or explanation of the carrier's data management system and the information available to track project participants, losses and loss trends
10. Carrier Representatives

    All key members of the actual service team or their supervisors should be present and required to participate. Appropriate representatives include:

    1. Underwriter
    2. Underwriting manager (optional)
    3. Safety representative
    4. Claims representative(s)
    5. Information system representative
11. Owner Representatives

    The oral presentations offer the opportunity to assess the personnel that will become integral and important members of the team. The owner should include staff members who will have direct interaction with the project team or provide specific information needs.

    1. Senior contact person with decision-making authority
    2. General council or a member of that staff
    3. Contract compliance officer
    4. Staff safety officer
    5. In-house project manager
    6. In-house safety officer (if applicable)
    7. Project Construction Manager's project supervisor and safety manager

    Where Project or Construction Management staff members are included as part of the evaluation team, it is typical to accept their evaluation form for information purposes only. Their inclusion is to assure that no barriers are identified that would disrupt a working relationship.

    Broker personnel also should be present, however their role is to act as non-voting technical advisors to the group. The broker can direct questions to the carrier during the presentation and assist the selection committee by providing explanatory information during the subsequent debriefing.

12. Evaluation Criteria

    The criteria may be more subjective during the oral presentations and can be done on a point basis or pass/fail for each topic.

13. Binding

    Based on the results of the evaluations, a carrier is selected. At this point the broker and owner may engage in best-and-final discussions in an attempt to improve particular components of the offer. The broker is then instructed by the owner to bind coverage. The binder is a legal document that summarizes all elements of the offer including coverage, costs and proposed services. It is a temporary document that is replaced by the actual policies, payment and service agreements. The broker prepares the binder and submits it to the carrier who must sign the document as the Authorized Representative.

    Payments - Payment of various components are subject to different time schedules as follows:

    Component	Timing	Adjustment	Comment
    Premiums
    Workers' Comp. And General Liability
    1. Expenses	Equal Monthly Installments based on estimated costs	Annually using actual audited payroll	Can be paid at inception, annually, quarterly or semi-annually. Modest premium reductions are offered for accelerated payment.
    	Option: Monthly based on actual reported payroll	Annual - random audit check of voluntary reports
    2. Specific State Surcharges or other assessments	At inception	In some cases depending on the state	Very minor cost
    3. Escrow or Loss Reserve Fund (Negotiable: generally equal to two months' paid losses. Example: If loss estimated at $3.6 million for project: Year 1 estimate = $1.2 Est. Paid 30% = $360K Two Months = $60K	At inception	Refunded at close of program	Escrow fund is used to pay losses during the first two months of the program. Subsequent paid losses are reimbursed by monthly billing. The fund usually is equal to two months' estimated paid losses. A project cost of $500 million with a three year duration might require an escrow of $75,000
    4. Letter of Credit	Due within 30 days of inception	Can be readjusted monthly, quarterly or annually depending on project size
    5. Monthly Paid Losses	Due five days after the close of the month
    6. Claims Handling Costs	Billed monthly
    Builder's Risk	Annual, monthly or quarterly	Yes - based on completed values
    Excess Liability	Annually	Negotiable - may be "flat" charge or adjusted on project hard costs or payroll	Markets may require accelerated payment depending on duration (excess of three years) and current market conditions
    Professional Liability and Pollution Liability	Annually	Negotiable - may be "flat" charge or adjusted on project professional fees	Markets may require accelerated payment depending on duration (excess of three years) and current market conditions
    Broker Fees	Monthly - generally initial payment is front loaded to address work performed in securing and implementing program	If service contract contains provisions for adjustment based on changing project conditions

14. Self-Insurance Reserve Fund

    The purpose of the reserve fund is to assure that financial resources are in place to pay the cost of insurance deductibles and other self-insured coverage.

    Some examples of the types of exposures that carry deductibles to be paid by the reserve fund include the following:

    1. Fire and other direct damage perils to buildings and contents
    2. General Liability
    3. Automobile liability

    Examples of exposure that would be paid entirely from the reserve fund:

    1. Theft of money and securities
    2. Automobile collision damage

    Examples of exposure that might not be subject to reimbursement from the fund:

    1. Mechanical breakdown of equipment
    2. Mysterious disappearance of property and inventory
    3. Obsolescence

    An independent auditor should monitor the operation of the fund continually. Such monitoring and evaluation of the fund and the exposure to loss to which it is subject is an essential part of any insurance process. Adjusting deductible levels, increasing safety and loss control efforts, and amending insurance coverage's are a few of the techniques available in managing the fund.

    Revenues to the reserve fund are budgeted each year to replenish those amounts expended on actuarial losses as well as to allow for the continued growth and actuarial soundness of the fund.