The High Cost of Insuring

Among the financial pressures weighing upon agencies during the severe industry downturn, soaring insurance costs have been little noticed, particularly in the area of healthcare. But during the last three years, companies have faced whopping annual double-digit increases."This is a hidden issue; most people don't understand how serious a problem it is," said Linda Dove, an svp at the American Association of Advertising Agencies in Washington. "The problem is the huge increase we've seen in [healthcare] premiums. Those costs are now 60 percent higher than in 2000."Skyrocketing insurance premiums reflect rising medical costs, as well as the stock-market boom and bust of the 1990s. Amid market heights, insurers, clamoring for investment capital, entered into new areas of coverage and even dropped prices below the cost of claim coverage as they battled for market share. After Wall Street's meltdown in 2000, insurers drastically raised prices. Many left those new areas of coverage, giving even more price control to the remaining carriers. The pace of those premium hikes increased further with the Sept. 11 terrorist attacks, in which insurance companies lost $40 billion.The problem affects businesses across the U.S., particularly small- and medium-size companies. On Madison Avenue, while larger industry holding companies have options such as self-insurance, smaller independents have much less flexibility, because they do not want to take large deductibles, and they do not have the financial clout of bigger purchasers."I just looked at our six-month numbers and asked, 'Why are we paying so much [for insurance]?' " said Robin Hafitz, co-chair at New York shop Mad Dogs & Englishmen, which has 30 full-time employees. "Part of our philosophy has always been to provide a good healthcare program, and a big frustration is that we continue to do that, and it's not necessarily perceived as a high- value benefit."Like other U.S. companies, industry employers have had to pass along higher healthcare costs to employees.Until the early '90s, the 4A's ran a health-insurance program that was of particular value to smaller members. That was discontinued after increased state regulation made it inefficient to continue nationally. Now, the 4A's has thrown support behind a bill that would create association health plans that would not be regulated by states. The legislation passed in the House of Representatives June 26 and now goes before the Senate.The Insurance Information Institute estimates U.S. businesses' insurance costs amount to less than 1 percent of revenue. While that may not seem significant, in areas like healthcare and workers' compensation, insurance is a fixed cost that disappears only when employees are cut. Workers' comp has shown some of the largest increases, rising 50 percent since 2000, said Robert Hartwig, III chief economist.In addition, since 9/11, the dimensions of coverage have expanded. "With workers' compensation [in the ad industry], it used to be a matter of someone getting treatment for carpal tunnel or someone getting hurt in a taxi," said Wendy Jones Lewis, evp of 4A's benefits. "Now, instead of carpal tunnel, you're looking at possibly paying out death benefits, which in New York could be $400,000 per person. … What is our exposure when buildings go down or a half a city goes down?"To that end, big agencies and holding companies may now be required to carry terrorism insurance in addition to the higher workers' comp premiums.

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The High Cost of Insuring

Noreen O'Leary

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Noreen O'Leary