Going Large with a Deductible Workers Compensation Insurance Program
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Workers compensation deductible programs have grown in popularity among staffing companies, as they can provide significant premium savings that help reduce total cost of risk and increase operating margins. Unlike guaranteed cost programs, which are relatively standard from carrier to carrier, large deductible programs are individually designed and filed by insurers. As such, greater diligence is required to determine which large deductible program is best and how it compares to other workers compensation alternatives.
Components of a Large Deductible ProgramBecause carriers file their individual deductible program with each state, no two large deductible programs are alike. Each deducible program requires careful review to fully understand the advantages and disadvantages of the program. Here are a few common elements of a deductible program.
The deductible is the amount of risk the policyholder is responsible for before the insurance carrier pays claims up to the policy limits and/or State statutory benefit level. Deductible amounts vary, but typically are offered between $100,000 and $1 million. The deductible can be per claim or per occurrence. The program can be structured with an annual policy deductible aggregate or unlimited.
Minimum Program Cost or Fixed Costs
Fixed costs are the premiums an insurance carrier will charge to take on the insurance risk over the selected deductible level, up to the maximum loss content amount. Fixed costs are auditable based upon standard premium, class premium, composite rate on payroll or some other mutually agreed audit basis.
Surcharges & Assessments
These state-mandated fees and assessments are applied against the guaranteed cost premium equivalent. Each state has its own individually filed surcharge and assessment amounts.
Claim handling can be administered by the insurance carrier (bundled program) or by a separate TPA Third Party Administrator (unbundled program). Claim handling charges are typically assessed as either a percentage of total loss amount or as a per claim fee categorized by report only, medical only or indemnity.
A loss fund is typically required that is approximately 10-15% of the anticipated policy loss pick (estimated final amount of paid claims after all claims are closed). The loss fund is billed against monthly, daily or weekly by the insurance carrier or TPA and replenished on the same basis as a cash fund for the insurance carrier or TPA to pay losses on behalf of the policyholder.
The insurance carrier takes on two main credit risks when providing a large deducible program. The first is exposure to loss potential for claims within the deductible that are not reimbursed by the policyholder. The carrier agrees to pay all losses and is held responsible to pay even if the policyholder became insolvent or otherwise failed to reimburse the carrier for claim costs incurred. The second is exposure to audit premium resulting from the payroll growth the staffing company experienced between the payrolls submitted to rate the initial policy and the actual audited payrolls. For these credit risks, the carrier typically requests collateral in the form of a letter of credit or cash equivalent to the anticipated costs of estimated losses.
Advantages to Insured
- Significant cash flow advantage over most other fully insured or alternative risk programs
- Increased market availability or number of carriers willing to underwrite staffing
- Increased incentive for implementing loss control programs
- Increased incentive for implementing return to work programs
- Advantages of self-insurance without having to obtain regulatory approval or incurring high start-up costs
- Easy access and exit
- Possible tax savings
- Possible Residual Market Load (RML) savings
Disadvantages to Insured
- Financial security required
- Numerous years of deductible policies may aggregate collateral to the point that it can deplete line of credit availability
- Unpredictable timing of claim reimbursements
- Risk of large, unpredictable losses, especially if no aggregate deductible applies
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