Whenever I see or hear about a failed controlled insurance program, I wonder how the sponsor made the decision to implement. Was it based on over-promised savings? Did anyone perform a thorough, unbiased feasibility analysis? Did the sponsor fail to consider factors that would doom the program?
In this two-part article, we will describe a process for evaluating controlled insurance program (CIP) feasibility, which includes a review of 10 key questions. This part addresses the first 5 questions. Part 2 will cover the 5 remaining questions.
Who Should Conduct the Analysis?
A controlled insurance program (CIP) can be sponsored by an owner, construction manager, general contractor, or combination of parties. A feasibility analysis can be conducted by the sponsor, a consultant or adviser, their broker, a different broker, or a combination of parties using a team approach. Since the sponsor has a substantial stake in the outcome of a CIP, it should lead the feasibility analysis effort.
The ability to conduct an effective feasibility analysis improves over time, and the evaluator's involvement with many and diverse CIP projects from beginning to end allows for a greater ability to foresee problems. Thus, experience is an important factor when selecting a firm to assist with or conduct a feasibility analysis.
Bias is also a significant consideration. When the party(s) evaluating CIP feasibility will also benefit from its implementation, problems can arise. Sometimes, however, the broker, broker/administrator, or consultant, who will also work on the program if implemented, is the best party to perform the analysis because of existing relationships. In this case, it is essential to solicit, and insist on, a balanced perspective and to take into account any potential bias when evaluating findings. Based on their prior CIP experience, bias can also be a factor even with an evaluator who will not be further involved in the program, if implemented, or with parties on the sponsor's internal team.
CIP Feasibility Analysis
CIP feasibility analysis is the process of considering whether a CIP is a viable risk financing option for a project. This analysis should not only determine whether a CIP is feasible but also whether it is the best risk financing approach for the project among all possible options. The questions below provide a framework for considering CIP feasibility.
The sponsor should begin its analysis as early as possible before project inception. Ideally, prior to engaging outside risk or insurance professionals to assist with the analysis, the sponsor, including the internal team, should consider these questions themselves.
The sponsor team can start by putting together their thoughts and ideas for each question and then fine tune the information over time as project detail is further developed. After this initial work, a well-educated sponsor may find they need assistance with a few areas only (for example, the current state of the insurance market, availability of coverage and limits, jurisdictional restrictions, or insurance cost estimates). This preliminary work and involvement by the sponsor will improve the analysis. Also, this will allow the sponsor and outside firm to compare their findings for each category, which will result in a more comprehensive perspective for both parties.
The following section addresses key elements for 5 of the 10 fundamental questions to consider when conducting a feasibility analysis. As the process is highly dependent on the individual characteristics of each sponsor, project, or program, attention to additional questions or elements not addressed below may also be necessary.
1. What Is the Project(s) and Exposure to Risk?
The first step in the analysis process is to understand the project(s) and identify its/their general and specific risks. Contract documents are a good place to start, if available. They can provide information such as the project description, delivery method, scope of work, location, staging, fabrication or other work areas, duration of work, safety considerations, and liquidated damages provisions. If the preliminary contract documents have not yet been drafted, the sponsor may have to pull together this information from other sources. Other helpful documents to review may include schedules of values; site plans, including surrounding areas; construction schedules; environmental impact reports; and funding arrangement documents. After gathering and reviewing all available documents, the analyst may also choose to interview the project team or visit the proposed jobsite(s) to gain a better understanding of the project(s).
The second step is risk assessment. This part of the process is often lacking in published feasibility studies. Where there is some discussion of risk in such studies, it is often "boilerplate" language that does not reflect much thought about the potential effects of the project-specific risks. For example, the project might involve a remote location or 24-hour shifts that can affect the workers compensation exposure. There may be an adjacent historical structure, an unusually high amount of nearby pedestrian or vehicle activity, utilization of a new construction method, or other hazardous operations that may influence the excess liability limit selection.
A collaborative approach is usually best for risk assessment in order to obtain as many perspectives as possible. An online search for "risk register" will return links to templates that can aid in this exercise. Often the project team has thought through both pure and speculative risk during the project development phase and can be a valuable resource. Another item to consider is how the identified risks will be allocated for the project and the ability of downstream parties to satisfy their requirements.
3. Are There Jurisdictional Requirements or Constraints?
For any CIP contemplated, the sponsor or their representative should research applicable statutes, National Council on Compensation Insurance (NCCI) or other state workers compensation rules, and any other documents that may provide information about requirements or restrictions for CIP implementation. Individual state statutes can mandate items such as minimum construction value limits, minimum premiums, coverage requirements, preapproval requirements, project type limitations, rating plan restrictions, safety standards, bid specification requirements, reporting requirements, defined project or program duration, usage of self-insured retentions and deductibles, or requirements for safety or claim personnel. Any of these factors can affect CIP feasibility. For assistance with this effort, IRMI maintains state wrap-up information for subscribers to The Wrap-Up Guide in Appendix J, State-Specific Wrap-Up Information.
It is also advisable to review any rules regarding the allowable management or direction of care in the applicable jurisdiction to get an understanding of a sponsor's ability to control its workers compensation costs.
4. Are There Contractual, Lender, or Other Requirements or Constraints?
It is possible that some requirements or constraints will be uncovered by the detailed document review conducted under items 1 and 3 above. The feasibility analyst should also review all insurance requirements in upstream contracts, including development agreements, lending agreements, ground leases, rights of way, easement agreements, etc., to ensure the analyst has a good understanding of all requirements. The analyst should confirm that a CIP is allowed for the project and identify any CIP-specific mandates. A project labor agreement, or prehire collective bargaining agreement, might also contain constraints relating to drug screening, which is required by some insurers.
5. Can the Sponsor Implement and Administer a CIP?
Once a sponsor understands the project(s) and has developed a clear vision of success for a CIP, the sponsor's ability and inclination to execute a successful program should be fully vetted. This critical question is often missed in a feasibility analysis process. CIPs are complex, are typically long term, and require significant resources and financial investment. This is especially true for combined line programs—CIPs that provide workers compensation, general liability coverage, and excess liability coverage.
One of the first considerations is a sponsor's CIP knowledge. If that knowledge is lacking, The Wrap-Up Guide is a comprehensive resource for sponsors to learn about CIPs. Additionally, there are free informative articles and topical presentations on www.IRMI.com, as well as articles posted online by other resources, such as brokers and attorney firms who specialize in construction risk.
Gaining enhanced knowledge will allow a sponsor to make more informed choices about program design and coverage; administration; and competently negotiating wrap-up administration service agreements and getting stakeholder buy-in, support, and confidence in the program. Sponsor experience is important as the successful operation of wrap-ups is an evolutionary process. One-time or one-off CIP projects can be learning intensive and time consuming. This should be strongly considered when an inexperienced sponsor is evaluating this type of project.
The analyst should consider a sponsor's understanding of and commitment to necessary risk control, safety, and claims management processes because the sponsor's support and involvement will be crucial to program success. The level of direct involvement in risk control and safety will depend on whether a sponsor is an owner or general contractor. An experienced evaluator will have a good sense of what type of risk control will be needed to facilitate a successful outcome and/or what measures will be required by the CIP insurer.
Another consideration often overlooked is change. Implementation of a CIP can require a significant amount of adjustment to an organization's processes. Many existing procedures can be affected by a CIP, including processes involving sales, procurement, estimating, bidding, contracting, accounting, risk control, safety, and claims management. To ensure program success, CIP education and training is necessary at all levels of an organization, including any supervisory and field personnel, along with modification of some of the existing procedures.
Inherent in the question about a sponsor's ability and inclination to implement and administer a CIP is how the sponsor views its overall responsibility to and relationship with its program participants. Future (post-project) positive relations with contractors is often an important consideration. An owner-controlled insurance program (OCIP) sponsor with a rolling program may wish to re-engage a general contractor for a future work, or a contractor-controlled insurance program (CCIP) sponsor may continually engage the same subcontractors for its projects. The sponsor may benefit from speaking with contractor participants at differing levels to learn their needs regarding project insurance and considering that information when designing their program. This effort can also assist with participant buy-in. There are varying opinions on this topic, and the sponsor and selected broker/administrator should be in general agreement about the approach and culture to be established for the CIP.