Creating an Accurate CIP Proforma
“Prediction is very difficult, especially if it’s about the future.” – Niels Bohr
For many years, wrap-up insurance programs have been sold based on heavy emphasis of one benefit; cost savings to the sponsor. The “wrap-up Seller” often directs attention to these possible savings via an illustration called a CIP Proforma or CIP Feasibility Study. Like proformas or feasibility studies used in other industries, the CIP Proforma demonstrates the potential cost benefit of a wrap-up. This exercise can be beneficial when the Proforma is used as a tool to understanding the variables that can impact cost savings and what financial benchmarks are required for a monetarily successful program; however, the myriad of benefits that a wrap-up can provide should not be neglected.
CIP Feasibility Study – The Methodology
The basic premise of the feasibility study is simple; the study compares the wrap-up costs (which include premiums, fees and deductibles) to the cost off-sets (or avoidance) achieved by not purchasing these coverages in a traditional manner. The cost offsets and wrap-up costs are variables that can vary greatly and can be difficult to accurately predict. A high-quality feasibility study will present the likely ranges within which these variables would fall, so the potential sponsor can explore the multitude of potential financial outcomes.
If the CIP cost offsets are larger than the cost of the CIP, the sponsor will realize a cost avoidance/”savings” by utilizing a wrap-up.
If the cost of the CIP is larger than the offsets, then obviously the net variance is a negative one.
CIP Feasibility Studies – What are the Variables?
- Program Sponsor
- If the program sponsor is an owner (OCIP) then the program offsets can only come from two places; insurance credits received from the contractors enrolled in the program, and the cost avoidance realized from not having to purchase their own project specific liability coverage.
- If, on the other hand, the program sponsor is a contractor (CCIP) then including the cost of the wrap-up as a line item in their budget/bid is often an option. The contractor then does not need to collect individual subcontractor credits to offset their program because the entire offset is received up front from the project owner.
- Large Trade Contractors
- Next to the GC/CM, the large trade contractors make up the majority of the cost off-sets received. Should these trade contractors purchase their insurance on a large deductible basis, through a corporate program, or via a captive then their cost offsets will likely be much less than anticipated as these types of program are frequently much cheaper than the traditional guaranteed cost policies.
- Comparable Coverage
- One of the benefits of purchasing a wrap-up is to secure broader coverage than is typically available from many contractors. The downside to this, if there is really a downside to broader coverage, is that the credit received from the participating contractors will be based on the coverage that they possess. While it is possible to request that the contractor insurance credit be based on equally broad coverage as is being provided by the wrap-up, it is often difficult to identify and verify an accurate amount.
Wrap-up Costs– The cost of a wrap-up consists of both fixed and variable costs. Included in the fixed costs are:
- Premiums for the primary WC and GL
- State Surcharges and/or Assessments
- TRIA charges
- Excess Premiums
- Brokerage/Administration Fees
All charges associated with claims incurred under the deductible comprise the variable component of wrap-up costs.
Presenting the Variables – Providing a Range of Outcomes
One of the things that we pride ourselves on at CRS is the constant effort that we put towards improving; improving our processes, our products and our systems. As a service company our “products” are our reports and communications; a pro-forma is one such report. When we put together pro-formas we review data that is housed in our RMIS, CR Insight®. This system allows us to aggregate data based on project type, location and even by specific WC code. However, even with a system this robust and accurate, all of the variables outlined above can cause significant variation in each wrap-up’s financial performance. It is for this reason that we have developed a method of presenting pro-forma information that utilizes a range of outcomes. Using this method we can demonstrate to potential sponsors a myriad of outcomes at a variety of performance levels. We can illustrate the outcome when losses are high and cost off-sets are low or conversely when cost off-sets are high and claim costs are low, and all variations in between.
There are many things to consider when constructing a wrap-up pro-forma, but the most important is always to understand your client’s needs, the project’s risks, and all of the variables affecting the outcome.
Learn if a wrap-up is right for your project – request a complimentary consultation here.