Four Essential Questions When Considering Loss Sensitive Programs
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Margin pressures are faced by every staffing agency owner every day. How can you compete against those that continue to lower markups in order to gain business and grow market share? How can light industrial agencies operate on markups in the low 30′s…maybe even the mid 20′s? The answer may be they have a strong risk management program and are taking risk in their workers’ compensation program.
Guaranteed cost workers’ compensation programs are still the most prevalent type of insurance program in the market today; however, based on the ever-increasing rates from the insurance carriers, loss sensitive options are gaining more traction.
How do you know if this is the right move for you? Some of the questions you need to ask are:
1. Do you have a strong risk management program?
You shouldn’t entertain a loss sensitive workers’ compensation option unless you have a strong risk management program and can exert some amount of control over your customer’s worksites and the outcomes of claims. You should employ at least one person whose primary responsibility is to administer the handling of your claims and/or manage your customer’s worksites.
2. Is your experience modification rate better than most competitors?
The average experience modification for the light industrial staffing industry is close to 1.20, so don’t think you need an experience modification of 1.00 or lower in order for a loss sensitive program to make sense. Many agencies with experience modifications of 1.50 or higher are in loss sensitive programs and are paying less for their worker’s compensation insurance than they would have in a guaranteed cost program.
3. Is your insurance company making money underwriting your risk?
Determining whether the insurance is profiting from underwriting your account and how much profit they’re potentially making is difficult. A good rule of thumb is to review the past five years’ worth of incurred claims (paid + reserved) and premium paid to the insurance industry. If your incurred claims are less than half of the premium you’ve paid, there’s a good chance you’re leaving money on the table.
4. What’s your risk appetite?
You must assess your ability and desire to take more risk in your insurance program. Loss sensitive programs elevate the risk you’re assuming, so the good years will be very rewarding, but the bad years could sting. Over a five year period, we typically find that in three of the years, you perform about as expected; in one year, your results will be worse than expected; and another year will be better than expected. Look at your own loss history, and you’ll likely see a similar pattern.
Loss sensitive workers’ compensation programs include retrospectively rated programs, deductible programs and captives. Minimum premiums for captives are typically $150,000-$200,000 (larger for retros and deductibles), so you don’t have to be a large agency in order to consider one of these programs. If you’re comfortable taking some risk and want to start to take control of your costs, you need to consider loss sensitive options.
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