Worker’s Compensation In A Hard Market - What Are My Options?
We have posted articles that discussed the current hard market and what it means to the staffing industry. The first step in the process of selecting the best insurance program for your company is to “Analyze” the situation. This involves reviewing the alternatives that are available. It is important that one does not wait until 30 days before renewal to review the options. Waiting this late to evaluate the alternatives will exclude some of the choices, as they are time-sensitive. Choosing an insurance program is a process that should begin no less than 120 days prior to renewal. Actually, the optimal scenario is to begin six months prior so you will have time to review the alternatives without the pressure of your expiration date. This gives both you and the carrier - program manager the ability to determine if the program will be the most beneficial for your company.
First, we need to define worker s compensation insurance. Worker s compensation is a no-fault type of insurance that pays both wages and medical costs for an employee injured on the job and prevents that employee from suing the employer. It is required in every state except Texas. Employer s liability is insurance that covers common-law suits against the employer that arise out of employee injury or disease. It is also used to provide stopgap coverage in monopolistic states where the only form of worker s compensation is offered by the state. Many different types of worker s compensation programs exist, but they all are hybrids or modifications of four basic types of programs: risk transfer/guaranteed cost, deductible/retro, captive or self-insurance. The factors that determine which program is the most beneficial include cost, payroll and/or loss sensitive, return potential, ownership/influence and service level.
Risk transfer/guaranteed cost…is the most commonly known form of worker s compensation insurance, especially to the layperson. This is basically where one contacts an agent/broker and requests basic coverage. This coverage is either the assigned risk market or the voluntary market. This carries the most expensive premiums, but may be more cash flow affordable since no investment is required. It is payroll sensitive only, meaning the premium is developed by multiplying payroll per hundred by the rates then by the modifier and any debits or credits. No regard is given to your losses for that policy period in determining the premium, thus the term guaranteed cost. By the same token, no potential for return on premium exists for positive loss experience. The insured has no ownership or influence over the terms of the program and the service level is standard, meaning it is not customized towards the individual insured.
Assigned risk is the insurer of last resort, also referred to as the state fund. This end of the spectrum grants the insured the least amount of control over your insurance program. It is also the most expensive. You will usually incur a surcharge, debits and have higher rates than any other program. The assigned risk pool is intended for startup companies or those involved with high risk operations. It is difficult for a staffing firm to stay competitive with coverage in assigned risk. The voluntary market can offer a beneficial scenario, especially in a soft market such as the one experienced in the mid to late 1990 s. Credits are often given and premiums can be low enough to make the other programs not worth the risk. This condition does not exist in today s market though. Some voluntary market options are still available, but they are few and far between and are reserved for companies with higher premiums and a clean underwriting history. Most carriers are not willing to offer this program to staffing companies today, as they are requiring the insured to at least retain some risk. Credits are definitely in the past.
Deductibles/Retros…are popular with carriers in today s market, as they believe the insured has incentive to control losses in these programs. While each uses payroll to develop the initial pay-in premium, both deductibles and retros are loss-sensitive. Deductible programs involve the insured paying for the first X amount of each claim. For instance a $100,000 deductible would mean the insured would self-pay each claim until it reaches $100,000 where the carrier would take over the payments. Typically the carrier pays the claims from first dollar then bills the insured to maintain reliability of proper reporting, claims handling, etc. Retros work in a fashion similar to guaranteed cost on the front end. The insured pays their annual premium during the year. Upon the completion of the policy period, a defined adjustment date is set and the insured is either assessed or refunded premium based on the terms defined in the retro policy.
The costs of these programs up front are somewhat lower than guaranteed cost, and can be considerably lower in the long run if losses are controlled. If losses go south, though, these types of programs can be disastrous for the insured. Aggregates have been increased in the hard market, meaning the cap on losses the insured is required to pay is much higher. Caution should also be used when evaluating the adjustment periods for retro programs. Consider both the time for the first review as well as how far out the carrier can continue to make re-adjustments. It is becoming common for 30-month initial reviews, which means you cannot receive the return for positive loss experience until a year and a half after the policy year expiration. This is important because many companies depend on the return to help fund the next year s premium. We recommend requesting 18-month from inception reviews when possible.
Captives…are often the best option for staffing firms with standard premiums between $250K and $750K. The premium for a captive is based on your loss experience. The cost of premium is generally as good as or better than the previously mentioned options. An investment is required for a captive program, which is what prevents some companies from selecting this option. A long-term perspective must exist in considering this option. Since it is loss sensitive, a strong risk management program is critical to ensure not only that you don t exceed your loss fund, but also that you maximize your potential for return on investment. A captive grants you ownership in your insurance program, requiring a commitment to be involved instead of just being insured. The results are great, as captives experience the best level of service, the most competitive and predictable premiums and protection from market conditions.
The hard part is getting into a captive program. This is the option that needs six months for which to research and prepare. Get references and all the background information available before selecting a captive. Talk to people both in the program and those who have worked with the program (such as vendors, associations, etc.) Ask about the level of risk sharing that exists and make sure you understand every detail of how the captive works before you commit to moving forward. If you don t, you fail to maximize the rewards of a captive program, and you could be scripting the demise of your company. A well-run captive is a treasure, but it is not a fit for every company. Spend as much time as possible in evaluating this option before moving forward.
Self-insurance…is the highest risk of all the options. Many companies will not be qualified to participate in this option. Each state has mandatory criteria for self-insuring. Only the state of Texas allows a company to “reject the act” and not carry insurance or qualify for self-insurance. Doing so removes your company from “exclusive remedy” protection, meaning an employee can sue your company when he is injured on the job. If you consider the option of self-insurance, it will be necessary to obtain an excess policy. This will cover for catastrophic losses that may be experienced. Failing to secure this coverage may result in bankrupting the company because no one can absolutely avoid such a loss. In the past these policies have been competitive, but due to the hard market and the frequency of catastrophic claims over the past few years it is not as easy to find these now. A skilled consultant should be utilized before exercising this option. The risks are too high to avoid evaluating every possibility when choosing to self-insure. Except for the large corporations, staffing firms will normally decide the exposures for this option are just too great.
The above programs are not all-inclusive. Many derivatives exist from these, and you will want to talk with your agent/broker and/or consultant in determining the exact programs available to you and which option will be most beneficial for your company. This should at least make you aware of the alternatives that exist and enable you to inquire and further evaluate if your current program is the best for you. Remember analysis and preparation are the most important steps on the road to evaluating your worker s compensation options in a hard market.
The principals of ArcAetos have a combined 50 plus years of experience in risk management, sales training, insurance, and information technology. Since 1997, JPA dba ArcAetos has been a consulting firm dedicated to educating companies on proper risk management techniques and assisting them in avoiding unjust premium charges by their workers compensation carriers.
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