Under Construction: Take Control of Insurance Costs through OCIPs
For years, universities have taken advantage of an insurance solution known as Owner-Controlled Insurance Programs (OCIPs) or “wrap-ups.” OCIPs provide general liability insurance and workers compensation for the length of a construction project for all or a majority of the parties involved rather than requiring each participant to be responsible for the procurement of insurance. OCIPs are used on large individual projects or on a “rolling” basis by aggregating smaller projects completed over time. A well-run OCIP can save a university 1-1.5 percent of hard construction costs. With university construction projects and capital improvement campaigns costing upwards of billions of dollars, OCIPs offer an opportunity for significant cost savings. The key advantage with an OCIP is control – control over costs, coverage terms and conditions, claims processes and loss prevention.
OCIPs enable a university to purchase insurance at a lower cost through economies of scale and enables them to purchase insurance on a loss sensitive basis (i.e. a large deductible), which is where the potential cost savings is derived. In a large deductible program, the sponsor of the OCIP pays the losses below the deductible in exchange for significantly reduced fixed costs (usually in the 35 percent range). If the university is able to control the losses on the project, the university directly benefits. In contrast, in a non-OCIP project, contractors include their insurance costs in their bids, which includes the fixed cost component of the insurance (about 40 percent) and the loss funding component (about 60 percent), regardless of whether or not there are any losses on the project.
Control Terms and Conditions
In an OCIP project, sponsors gain peace of mind that all contractors on a construction site have the same coverage and there are no gaps. The level of coverage that can be negotiated when purchasing in bulk is significantly greater than what an individual contractor can purchase on their own. The total liability limits available (usually a minimum of $100M) through the OCIP are much greater than the limits provided by the individual contractors.
Control Claims Processes
In the event of a claim, having consistent coverage provided by one insurance company for all contractors’ streamlines the claims process. By assuming the first $250,000 or more of every workers compensation and general liability claim through a large deductible program, universities gain the ability to influence the claim and dictate how it should be handled.
Control Loss Prevention
The key to success on any OCIP is loss prevention. Since the owner is paying the losses below the deductible, the owner has a much greater ability to control the loss prevention measures utilized on the project. This is important not only for controlling costs, but for meeting construction timelines.
An OCIP in Action
The most successful OCIPs focus on loss prevention since it’s the key to cost savings. In 2007, The Graham Company took over the administration of an existing rolling OCIP for an Ivy League university. At the time, the program contemplated several billion dollars of construction over a 10-year period, consisting of new dorms, academic buildings, utilities and laboratory space. Through an evaluation of the university’s current program, the firm determined the university’s program could be strengthened by putting more of a focus on loss prevention and claims management measures.
From a loss prevention standpoint, the firm implemented a drug testing protocol, which included on-site drug testing; got construction managers to agree to a fall protection policy; and got them to comply with accident notification and written investigation reports for each incident that were followed up by formal meetings. In addition, projects were observed 2-3 times per week and the firm provided written reports to the university and respective construction managers regarding non-compliant safety issues observed. The firm also hired a full-time safety consultant to be its eyes and ears on the construction site.
In the past, the leadership was not briefed when accidents occurred, or as claims developed over time. Worse yet, the university was unaware of claims management and settlement decisions being made. To improve the claims management process the firm implemented several changes that aimed to keep everyone from leadership to construction managers and subcontractors informed.
Within the first year of making these changes the university experienced an over 50 percent reduction in claims costs. By the time the projects in the OCIP were completed, losses per $100 of payroll had gone from $10.91 per $100 of payroll (based upon over $61,000,000 of “pre-Graham payroll”) to $2.22 per $100 of payroll (based upon almost $57,000,000 in “Graham payroll”), an almost 80 percent reduction.
Control probably isn’t a word universities use when referring to their insurance program, but a wrap-up can change the conversation. A wrap-up can allow universities to streamline the administrative process and gain better control of insurance costs today and in the long-term.
Carl Bloomfield and Thomas Morrin are producers at The Graham Company, one of the mid-Atlantic region’s largest insurance and employee benefits brokers.