Workers’ compensation is one of the main drivers of cost for many businesses, especially those that are involved in high-risk or more blue-collar industries. In the insurance world, these companies are assigned higher rates due to the risk associated with their business operations which naturally drives higher premiums.

High-risk does not equal a high volume of workers’ comp claims or large losses. Many businesses that are highly focused on employee safety and minimizing claims feel they are paying more than their share for insurance year after year. They are probably right, and for those who meet the qualification criteria, there are other options.

Spectrum of Risk

Everyone who buys insurance has heard the term “deductible.” But what is it? A deductible is the portion of the loss paid by the insured before the insurance company steps in to cover the claim.

Within the idea of deductibles, there are many programs and ways to structure your program that increase the risk vs. award equation. You may hear the terms “alternative risk” or “loss-sensitive” programs. Typically, it starts to make sense to consider these alternative risk financing options when the premium on the qualified lines of insurance is above $250,000 annually.

Here’s a brief overview of some of these programs.

Guaranteed Cost

This is a typical insurance program where premiums are established up front and paid throughout the year. There is sometimes potential for a dividend on the workers’ comp, but you essentially pay the quoted amount, regardless of how you perform from a loss perspective.

Guaranteed cost programs feature:

• No upside risk
• Stable cash flow
• Good loss performance benefits the insurer
• Insured is subject to market conditions and swings
• Insured has little control over handling of claims

Group Captives

With a group captive program, insureds join with other like-minded companies to own their own insurance company and benefit from group purchasing. This method allows companies many of the benefits of self-insurance without all of the risk, making it ideal for companies too small for other programs and interested in limiting their risk. It’s important to note that these programs are different than single-parent captives which are designed for one insured and take on more risk than member-owned captives.

Group captives feature:

• High dividend potential with significant financial opportunity on workers’ comp, general liability, auto, or any combination of these coverages
• Balances swings in the marketplace and stabilizes rates
• Claims handling is unbundled to a third-party administrator, increasing control of claims settlements
• Members benefit from group purchasing of insurance, networking, and owning the insurance program
• Compared to other loss-sensitive programs, fixed cost is relatively high
• Potential for assessments (upside risk)
• Collateral requirements
• Slow dividend return

Retrospective Insurance Programs

Retrospective insurance programs, also known as retros, are a concept similar to the captive in terms of total premium being derived from an upfront fixed cost plus losses throughout the year, except the business stands on their own with no group support. This can be set up as an incurred retro, where insured pays claims from their own pocket throughout the year, or paid retro, where the insurance company pays for the claims and is then reimbursed by the insured. Paid loss retros are more rare, as they give the insured more control and require a more sophisticated risk management team in-house.

Retrospective insurance programs feature:

• High return potential with limited upside risk exposure
• Program design flexibility – paid vs. incurred, customizable deductible amounts
• Less collateral requirements
• Higher aggregate risk within the deductibles
• Multiple adjustment periods for return
• Bundled claims with insurance company is most common approach

Large Deductibles

In this insurance plan, the insurer is responsible for reimbursing the insurance company for claims up to a certain dollar amount, typically starting at around $250,000, and the insurance company pays for the dollars above that amount. At the end of the policy period, the insurance company calculates the amount owed to them by the insured and invoices them through multiple adjustment periods. Like the other programs, the business starts by paying a standard premium and then pays subsequent losses within the deductible. The insured also needs to be aware of their aggregate deductible – their cap on how much they can pay during the policy period in claims below the deductible amount.

Large deductible programs feature:

• High return potential with low fixed cost
• Higher required collateral
• Claims typically bundled with the insurance company
• Aggregate deductible used to limit maximum out of pocket cost

Qualified Self-Insurance

In a self-insurance model for workers’ compensation, the insured pays claims out of pocket and actually seeks reimbursement from the insurance company for claims above a certain amount. Businesses must seek approval from the state to establish this type of program. The insured has control of all insurance-related vendors and claims handling is unbundled. Occasionally these company with handle claims administration in-house. Compared to other alternative risk financing programs, qualified self-insured programs provide the highest possible return and cash flow but come with the most risk. Businesses involved in these programs tend to have sophisticated risk management teams that handle insurance-related activities that are usually outsourced to the insurance company.

Qualified self-insurance programs feature:

• Highest return potential and lowest fixed cost
• High cash flow
• Unbundled claims handling
• State approval required – each state handled separately
• Complex in-house administration required

Our Team Helps You Make the Right Choice

Navigating these programs and more can be overwhelming for any business owner, which is why our experts at Holmes Murphy are here to help. If you’re ready to reevaluate your risk management strategy and ensure your workers’ compensation program works best for you and your employees, reach out today and let’s start a conversation!