Based on its survey of 2,013 private and public employers, Kaiser/HRET found that the percentage of all businesses offering health benefits has fallen from 69 percent to 60 percent over the past five years. In that same time period, there have been double-digit increases in health insurance premiums until 2005, when the increase dipped to 9.2 percent.

It is no wonder then, that in a 2005 NEWS survey of over 300 HVAC contractors, insurance costs ranked No. 2 in the list of business concerns, only trailing profitability. The survey results, published in the Aug. 1, 2005 edition, showed that 18.2 percent of respondents listed insurance costs as their No. 1 concern. Having good insurance benefits is a two-edged sword: they are costly, yet necessary to find and retain good workers.

High insurance premiums have even kept a one-person shop from expanding. Survey respondent Scott Lawson said he "cannot afford workmen's compensation to bring on [his] first employee."

Other respondents said that the rates are rising faster than they can adjust pricing to cover the increases and maintain a consistent profit picture. Contractor Charles Rauch said, "In the last five years my insurance costs have almost tripled. It is effectively cutting into my profits, and I am not seeing any relief."

ROOT CAUSES OF HIGHER INSURANCE RATES

Before 2000 the insurance market was enjoying heavy returns on investments. Christopher McClain of Lassiter-Ware Insurance, Maitland, Fla., said that during those times the insurance market was considered a soft market where the true underwriting rates were influenced heavily by the investment returns made by the insurance carriers. The financial returns on dollars invested did offset underwriting losses allowing the companies to justify discounting rates beyond what was considered prudent underwriting standards for most accounts. "In most cases the premium increase that an insured felt during the period of time from 1994 to 2000 was a result of the growth in the business not increase in rates," he said.

By 2000, insurance companies' underwriting directions began to change due to the shift in the investment returns from a stock market which was seeing the technology segment dissolve before their eyes and returns diminish.

Directions were also affected by the events of Sept. 11, 2001, which took a stock market that was in the process of a correction into a full-scale dive with losses of up to 50 percent on portfolios. These losses effected the investments of the insurance companies. The large loss of capital suffered by insurance carriers by the resulting claims payments made it a necessity for survival, which was getting back to the basics of profit underwriting.

"The sharp drop in the capital markets since 2000 have played a significant role," said Doug Irvin of the Silverstone Group, Omaha, Neb. "Since insurance companies couldn't make adequate investment income, they turned their focus to making an underwriting profit. Before 2000, insurance companies were willing to accept losing money from an underwriting standpoint, as they could make it up through investment income. After 2000, they became a lot more conservative with respect to risk selection and increased rates to improve their loss ratios."

Greg Wilkerson of the Frost Insurance Agency, Fort Worth, Texas, agreed. "In 2000 the stock market decline changed the insurance company underwriting philosophy from making their profits in the stock market back to underwriting the risk to make a profit based on the actual chances for loss on that customer and the type of business that the customer is in. For the first time in 10 to 12 years we start hearing the carriers say underwriting profit."

The natural disasters in recent years, including Hurricane Katrina, have had an impact on insurance rates, too.

In a normal 10-year cycle, insurers and reinsurers (companies that insure again or have insured accounts transferred to them) expect two or three major catastrophes. But since Hurricane Andrew in 1993 there have been major catastrophes every year. In 2005 there were four hurricanes in six weeks in Florida. Steve Childs of Dan Lawrie Insurance Brokers Hamilton, Ontario said, "There is obviously no question that the compression of time over loss is the largest major cause of rate increases. Insurers' reinsurance costs went up as much as 70 percent in 2003 alone."

One insurance agent cited high worker's compensation insurance rates as a reason why business owners have fewer choices among agents today. George Luther of Allied North America, Fremont, Calif., said, "In California we have seen the cost of insurance dramatically decrease in premiums especially with worker's compensation. Currently, prices for worker's compensation have come down significantly and are resembling the 1990s when many companies went out of business because their rates were so low. We anticipate that these decreases in rates have leveled out in 2006."

Having fewer choices of insurance carriers also has an effect on premiums. Irvin sees that as the main reason why rates have increased in the past five years.

"Ten to 20 years ago, there were probably in excess of 35 insurance companies that would accept contractors," he said. "Many of those companies have either gone out of business or been acquired by another insurance company. Now there are perhaps 10-15 insurance companies that will consider construction risks."

And speaking of construction risks, new threats to contractors are construction defects.

Construction defect claims and legal defense costs continue to rise. In most cases legal fees are paid in addition to the limit of insurance, but many companies that insure residential contractors are placing legal fees inside the limit of insurance, which can exhaust the liability limit prior to a payment being awarded.

"A/C contractors in residential new construction will continue to have a tougher time in the insurance market due to Construction Defects Liability," said Wilkerson.

TAKING ACTION TO REDUCE COSTS

One of the obvious first steps is the structure of the policy, namely the deductibles. An insurance policy with a higher deductible equates to a lower premium. The risk is that the initial outlay to cover a claim will be higher but since insurance is a risk by its very nature, fewer claims lower the overall cost of the policy. For example, if a company has a good safety record, with below-normal worker's compensation claims, paying higher deductibles when a claim is filed is worth the risk of paying a lower premium.

"Consider raising your deductible or Self Insured Retention and looking at loss sensitive programs if it makes sense financially," commented Luther.

"Rethink your tolerance for risk," said Childs. "Do you know your premium savings if you went from a $500 deductible to $1,000 or even $2,500? If you can save the difference within 18 to 24 months you are likely overinsured."

Most insurance agents suggest taking a proactive approach to reducing insurance costs, including safety programs. Part of a good safety program is being able to identify employees who may be an insurance risk.

"Implement proper operation and safety procedures to avoid potential losses," noted Tim Foran of Cellucci/Foran Insurance LLC, Villanova, Pa. "In hiring I recommend background checks and proper screening to ensure a qualified technician. This should help to reduce potential losses. And have annual meetings with your insurance agent to review deductibles and possible coverage changes."

Wilkerson noted that basic loss control and prevention with HVAC contractors would be auto safety, lifting, and falls. Auto safety basics would be condition of the trucks, proper drivers' training, driving records check, drug testing, and periodic drivers safety meetings. "Lifting suggestions would have to be company policies in place for lifting weight maximum limits, calling for assistance, and periodic training," said Wilkerson. "Avoiding falls would be training, as well as proper tie down techniques, and type and conditions of the ladders. These are the three most common areas of claims for HVAC contractors."

Lowering insurance premiums comes down to how a contractor can manage his or her risk. Insurance agents spend a great deal of time explaining specific risk management programs and techniques. McClain is one agent who spends a lot of time covering all aspects of risk management.

"I make every effort to work with all of my clients on their risk management," he said. "To the insurance carriers this is the most important issue that an insured can do to help him reduce the cost of his insurance product. Our program is designed to help reduce the claims activity, which reduces the loss ratio of an insured and in turn make our insured very attractive to multiple companies, which leads to competitive pricing for our clients.

"The fewer losses the lower the loss ratio, the lower the loss ratio the lower the cost of the insurance."

Wilkerson counsels his clients on the total cost of risk. He breaks it down to the indirect cost of a claim, which accounts for 80 percent of the total cost, while 20 percent is the direct cost which is normally the cost of insurance.

He noted, "Contractors should be aware that Occupational Safety and Health Administration (OSHA) data suggests that the indirect cost (down time, rehiring, retraining, time dealing with an accident) of an accidents is between 1.5 and 4.5 times the direct cost of a claim. While keeping insurance premiums down is important, addressing the 80 percent of the true cost of risk is more important. When this is properly addressed a byproduct will be a lower cost of insurance premium. This is addressing risk management and risk control as to the entire organization and risk from all areas."

Since information is readily available via the Internet, contractors can shop around for insurance carriers that will tailor a program specifically to their individual needs. One agent said it is imperative that business owners do not wait until the last minute to make a switch in carriers or to do their research. Childs suggested opening a 90-day window before the expiration of a policy to do the necessary research.

He also said, "Get your broker to shine the apple. Sit down and tell him or her what makes you better than the competition. Do a company profile discussing the following: length of time in business; resumes (brief) on your companies senior management; loss control measures you have or are willing to implement; your attention to safety and detail.

"Underwriters have a term for first rate business owners. It is called best of class. In order to get your best terms you need to have your insurer refer to your business as best of class.

HOPE FOR LOWER COSTS?

Irvin said that the strength of insurance companies, which is getting better, should have a big impact on rates in the near future. "Insurance companies have generally returned to profitability, due to rate adequacy and underwriting discipline," he said.

"As a result, we are beginning to see the market soften. With the exception of worker's compensation, rates on all lines of business for contractors tend to be declining by 5 percent to 10 percent for companies who have clean loss histories. Worker's compensation rates tend to be flat to 5 percent higher, depending on class codes.

"If the capital markets continue to generate solid investment returns for insurance companies, this trend should continue and possibly even push prices down further. However, controlling losses will still be the key to holding your insurance pricing down, especially in the worker's compensation area."

All of this should be good news to HVAC contractors, according to Foran. "The insurance market does seem to be softening," he said. "Insurance companies that in the past have either pulled out of the market or taken large increases appear to be willing to get back in the HVAC business."

But along with the good news comes words of caution, too. The worker's compensation issue will continue to loom large over the construction industry and continuing litigation will take its toll on contractors. According to Luther, the HVAC industry faces a mixed bag of news in the coming years.

"We anticipate that insurance costs for residential will stay high because of litigation," he said. "But for commercial contractors the pricing should remain low for another couple of years. We are seeing rate decreases in general liability and worker's compensation, but we are seeing rate increases in other lines of coverage like pollution and directors' and officers' coverage.

"We still do not know the full impact that Hurricane Katrina and other natural disasters will have on the industry as of yet, but the insurance industry still has the ability to write business."

Sidebar: Tampa Discussion

The group included Lee Robinson of Climate Design, Clearwater; Tommy Castellano of Castellano Air Conditioning & Heating Inc., Tampa; and Bruce Silverman of Airite Air Conditioning Inc., Tampa.

Robinson said that his company carries $1 million in insurance for its employees, making it the "biggest individual line item" on the books. He said that hospitalization costs are leading the way in rising insurance rates. "Employees drop out of the insured [pool] when they don't have insurance," he said. "And hospitals take in these uninsured people which eventually drives up the cost of everyone's insurance."

He added that companies have to bite the bullet of increased rates or limit or drop insurance benefits for employees. "It would be a competitive disadvantage if we didn't offer insurance," Robinson said. "The government needs to mandate insurance coverage for all employers. Costs would go down since everyone would be participating in insurance programs, not just a few."

Robinson noted that there should be some type of base insurance program for employers. Employers could then choose to add or customize the program for their own employees. Climate Design employees currently contribute 35 percent to their insurance. Castellano employees contribute 50 percent.

"I honestly don't like my current medical insurance program," added Castellano. He is hoping that a local contractor group will establish a program for contractors to participate in, thus lowering program costs. But he knows about the politics of groups, too. "Organizations tend to fight each other rather than work together," Castellano said. "Everyone has their own agenda and they don't like giving up their power."

Silverman said that contractors need a stronger buying power and sees the Air Conditioning Contractors of America (ACCA) as a group that has this buying power. ACCA is very supportive of association health plans (AHPs), which are designed to keep insurance costs lower, based on group membership.

Silverman, agreeing with Robinson, said that the government needed to somehow intervene. "Maybe insurance should be a government program," he noted. "At least we could all be on the same level playing field. And people would have the chance to buy up if they'd like."

Robinson thinks employers should encourage their workers to have regular health checkups or make them a mandatory part of any health insurance plan. "People tend to ignore preventive medical treatment and that leads to worse things down the road," he said.

Castellano said that some job applicants don't even ask about health care when they apply because many are "young, single, and healthy." They simply don't know or don't care about the benefits of health insurance.

"We aren't attracting enough young people to the trade and yet we worry about offering health care benefits to get a competitive advantage," said Silverman.

The NEWS wants to know what you think about insurance costs and other issues. Would you like to host a roundtable discussion? Let us know. Please e-mail John R. Hall, business management editor, at johnhall@achrnews.com.

Publication date: 04/03/2006