Rising Premiums Remain Problematic

Alternative strategies that can help boost your bottom line

It is no secret that business owners in many industries are being confronted with rapidly escalating insurance costs. In a recent survey by the National Federation of Independent Business, the cost of insurance was named as the biggest concern in 2004 by more companies—28 percent—than anything else.

Insurance struggles are especially rampant in the gases and welding industry, where the two alternatives seem to be more expensive coverage or no coverage at all. The concerns of employers are well-documented, but the solutions to the problem are not as obvious. Many GAWDA members have already felt the pinch.

Pat Silvey

Fred Silvey, president of Harriman Welding Supply (Harriman, TN), says that his liability insurance was canceled because his carrier was bought out. The quoted rates he received from other providers were about 25 percent higher than what he had previously paid. “We finally had to give in and pay the higher rate to get the insurance,” he says. Silvey is concerned that insurance companies perceive the gases and welding industry to be more dangerous and susceptible to claims than it actually is. “Insurance companies are not educated enough about what we do. They can watch a gasoline tanker catch on fire and burn on the interstate every day, but maybe twice a year they see a couple fires at different fill plants, and it gives them a sense of anxiety.” Harriman Welding Supply is trying to offset the higher premiums by raising prices and rental rates, but there's only so much customers will tolerate. “It's been a real struggle,” Silvey says.

At Albright Welding Supply (Wooster, OH), President Jim Horst provides an interesting perspective when he says, “We operate with the opinion that although we purchase insurance and pay the premiums, it is not necessarily wise to make claims. It is our feeling that any claim, regardless of the reason, will come back in later years as increased premiums,” he says. Horst increased his deductible and doesn't claim anything less than $3,000. Everything below that is paid out of pocket. Horst is currently pleased with his coverage, but understands the difficulties of finding a satisfactory provider. “Several years ago for a period of about four years, our insurance vendors decided to stop writing our industry. We were left with the annual task of seeking a new provider, at ever increasing rates.” He agrees with Fred Silvey that the industry has an unfair reputation. “Insurance companies view our industry as hazardous, whereas we understand that the products we handle require knowledge, respect and safety. Our industry has taken care of itself for years and always has been on the forefront of safety,” he says. “Unfortunately, a few bad apples here and there cause losses, and the insurance companies turn away from us.”

After facing rising costs for a number of years, Chip Lewis, CEO, Airtec Inc. (Altoona, WI), decided to do something about it. Five years ago, Airtec chose to self-fund health insurance for its 70 employees, and did the same last year with its general insurance. Airtec's health plan insures each individual up to $35,000, and anything over that is insured through an insurance company. (The general liability plan covers losses up to $15,000.) “It's a roll of the dice because one year it's good and the next year it's bad. Sometimes you come out ahead, and sometimes you at least break even on what you would have paid on a typical insurance package.” Despite the risk, Lewis says the strategy has worked because premiums have gone down and the small incidents don't pop up as individual problems during the bidding process the following year. Like any gamble, the prospective reward outshines the potential risk. “I would recommend it if you don't mind taking a chance,” he says. “In our case, it can cost up to 10 percent more than regular insurance, or we can save as much as 30 percent. It's like playing the stock market. It amounts to playing the aggressive stocks or the money market. A number of incidents at $35,000 per individual can hurt, but I'm willing to take the chance that we won't get hit that badly. There are aggregate levels that will stop most of the heavy blows.”

Surely, these distributors represent only a fraction of concerned business owners, but almost all can relate to these stories. But what is causing the rates to increase so dramatically, even for companies that don't have a history of high claims?

Uncovering the Answers
One reason for high rates is a lower global capacity for insurance. According to one estimate, the World Trade Center since 9/11 has eaten up nearly half of the world's insurance reserve funds. Insurance companies have thus been forced to tighten up their offerings, increase premiums and try to make an underwriting profit.

Patrick Gleason

But even before 9/11, insurance carriers were already beginning to remove themselves from the gases and welding industry. For the previous 13 years leading into the new millennium, there existed a soft market for insurance in which prices were dropping, but in 2000, the market began to level out. According to Patrick Gleason, CIC, senior vice president of Schaefer-Smith-Ankeney Insurance Agency, when the market begins to harden, insurance gets broken up into “hazard classes,” a way of ranking industries in order of risk. Welding supply is a five on the six-point scale, meaning insurers are likely to back away. “They want to cover the less risky classes. If they do write this class, they only want to cover the superior companies with great loss control,” Gleason says.

As more and more insurers turn away from the welding industry, there is less competition to keep prices down. “The marketplace has shrunk in terms of available insurance markets for welding supply and industrial gases companies. Three or four years ago, there were eight companies that would write this class of business, and today there are only two that are nationwide.”

Making matters worse, the welding rod issue has really scared away insurance companies. Gleason reports that he knows of one insurance company that has seen over 300 welding rod-related claims, representing more than 10,000 plaintiffs, come through in the last three to four years. As a result, some of the companies who still write insurance for gases and welding distributors have begun putting “welding rod exclusions” on their policies to avoid the potential for litigation.

Ways to Protect Yourself
Gleason offers several suggestions for distributors to shield themselves from destructive situations.

• Be sure to ask major suppliers for additional insured vendor's coverage, especially from anyone supplying welding rods.
• Continue to send out MSDS sheets, adopting the language in the August 2002 Tip of the Month from GAWDA.
• When buying products manufactured in a foreign country, purchase from suppliers who carry United States insurance.
• Do not “repackage” items such as welding rods or break open packages and sell partial contents; this practice can lead to an assumption of some of the manufacturer's liability.
• Spot check medical gases for purity and maintain a log of those tests and the results. Have the log available for examination during visits from insurance loss control.
• If you supply nitrogen to dewars for cryogenic storage, have labels printed and place them on all dewars that may hold samples. They should read, “User is responsible for monitoring nitrogen level and making sure unit is filled regularly and kept in good working condition. No [your company name] representative has authority to relieve user of this responsibility.”
• Secure Certificates of Insurance “Additional Insured - Vendor” in favor of your company from all suppliers of industrial hardgoods, including all welding related hardgoods and all suppliers of compressed gases showing limits equal to or greater than your limits and effective dates within your policy period.
• Establish and maintain these certificates on file with a master log indicating when renewal certificates must be received.

Additionally, Gleason suggests coordinating a formal quality control program and making sure all employees involved in sensitive operations are properly trained and that the training has been documented. Following these tips could potentially save businesses from unpleasant and costly circumstances.

Health Care: The Facts
Adding to the problem of general liability insurance is the high cost of health insurance and benefits. Monthly health insurance premiums rose 13.9 percent from 2002 to 2003, the third consecutive year of double-digit premium increases and the highest premium increase since 1990, according to the 2003 Survey of Employer Sponsored Health Benefits by the Kaiser Family Foundation and the Health Research and Educational Trust. Despite the hefty increases, 66 percent of all firms offered health coverage to their workers in 2003, but the rising costs did induce 62 percent of companies to shop for a new plan, and 33 percent changed health plan types or insurance carriers.

Even worse news can be found in recent research by the National Association of Wholesaler-Distributors, which says distributors' health insurance premiums increased by 16 percent in 2004. Employers with 50 or fewer employees were affected most, facing a 20 percent average jump. Increases like this one put employers in a bind. Good health benefits are deemed as a requirement to attract and retain good employees, but the prices are too high to maintain profitability. For now, 99 percent of companies responding to the NAW survey offer health insurance as an employee benefit, but that number will likely drop as costs rise.

Todd Newton

The biggest catalyst behind the high cost of health insurance is simply “medical inflation,” says Todd Newton, senior employee benefits broker at Schaefer-Smith-Ankeney, although other factors are at work. “HMOs have really jumped on insurance companies to try to get them to renegotiate their fees, but providers have been resisting. Also, there have been some class action lawsuits on the HMO side that some of the insurance companies are paying for, which spills over to the insureds. Prescription drugs are becoming a bigger piece of the budget every year because the R&D costs of new drugs are passed back through the pricing.”

Employers can fight back with alternative funding strategies like cost sharing arrangements with the insurance companies, going away from now high-priced HMOs, returning to PPOs, increasing the amount employees contribute toward premiums and increasing co-pays and deductibles. “Nothing is going to be perfect or foolproof, but there are definitely some new options available in the market,” Newton says. “Employers have to do something more creative because the health insurance of the past is just not working.”

Alternatives to Standard Plans
In addition to the strategies offered by Newton, employers are trying myriad ideas to combat these high premiums. Some companies are increasing the amounts employees must pay for less-serious conditions like allergies or hair loss treatments. Others are comparing benefits to their competition to see what needs to be included in their own benefits package to avert high costs and still attract qualified talent. There are also options completely separate from fully insured plans, such as those below.

Self-Insurance
Airtec is not alone by turning to self-insurance, where employers pay for each claim as it is incurred rather than pay a fixed premium to an insurance carrier. Self-insurance was once thought to be possible only for larger companies with substantial cash flow, but according to an article in The Wall Street Journal (December 30, 2003), more small and mid-size companies are switching to such plans. “With self-insurance, smaller companies set aside an amount for routine health claims, purchase special insurance for catastrophic or unusual losses, and typically hire a third party to handle the administrative details,” the article states.

Two main benefits of self-funded plans are the ability to customize according to specific employee needs and no prepayment. According to the Employee Retirement Income Security Act, self-insurance is considered an employee benefit plan instead of an insurance contract, sparing companies from state premium taxes. On the other hand, self-insurance does have its drawbacks. For example, claim costs will likely fluctuate from year-to-year, variations that would normally be absorbed by the insurer. Also, companies need to purchase additional “stop-loss” insurance to cover claims over a specified dollar amount, and one or two catastrophic claims could quickly cause problems for a self-insured firm. For more information on self-insurance plans, visit the Self-Insurance Institute of America at www.siia.org.

Health Savings Accounts
In December 2003, as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, Health Savings Accounts became a reasonable option for health care. Employers can contribute on behalf of employees, like a 401k, which may be an alternative for companies stuck paying huge premiums. These accounts are set up with pretax income, and withdrawals used for health care are tax-free. The money in these accounts gets rolled over each year, permitting low-risk individuals to accrue a hefty sum. However, these plans require employees to be enrolled in a health plan with a high deductible and a high out-of-pocket maximum. Another drawback is any withdrawal not used for health care comes with penalties and taxes. Read more about Health Savings Accounts by following one of the links at www.aahp.org.

“Decreasing The Cost Of Health Insurance,” in the Spring issue of Welding & Gases Today, details how employers can use Health Savings Accounts to save money on insurance premiums and corporate taxes.

Other Options
Small businesses should keep abreast of the controversial Small Business Health Fairness Act, legislation exempting Association Health Plans (AHPs) from state insurance regulations, a move that could allow AHPs to proliferate. In his 2004 State of the Union address, President Bush urged Congress to pass AHPs. “Small businesses should be able to band together and negotiate for lower insurance rates so they can cover more workers with health insurance.” As of press time, this legislation had passed in the House but still awaited action by the Senate. Essentially, AHPs offer small businesses the opportunity to join together through trade and professional associations to collectively purchase health benefits at lower rates than they are typically offered individually. However, some argue that these plans, in the absence of state regulations, would encourage price-gouging on high-risk candidates. Read more about AHPs at www.ahpsnow.com.

The best way to rein in rising premiums on all types of insurance is still the old-fashioned way: do your homework. It is essential that businesses research their options and find the best plans to fit the needs of the company. Remember, cheaper is not always better.