While workers’ compensation is mandatory in nearly every state, there are different plan structures available depending on the insured and its loss history experience, commitment to safety and loss control, and risk tolerance. Two such plans are guaranteed-cost and loss-sensitive coverage.
Guaranteed-Cost Plans
A guaranteed-cost workers’ compensation insurance policy is the most typical plan that insureds purchase to cover on-the-job injuries and illnesses. Clients pay a set premium based on their exposure base for the policy term regardless of the number and amount of losses that occur during this period.
The basic guaranteed-cost program premium is calculated from a rate multiplied per $100 of the employer’s payroll. The final workers’ compensation bill for the policy period occurs after the premium audit for that policy year. Once the policy is issued with the rates per $100 of payroll, those rates usually cannot change during the policy. Insureds know exactly how much they are going to pay for coverage for the current policy term. Most small and medium-sized businesses typically find a guaranteed-cost program as the most desirable insurance policy to cover their workers’ compensation claims.
There are disadvantages, however, to guaranteed-cost plans. The cost during the policy year is generally higher for these types of plans because the carrier takes all of the risk and pays all of the expenses. In addition, an insured pays the same amount even if the firm’s loss experience is better than predicted, so there is no immediate reward for good performance. Clients are also impacted by the state of the insurance market (hard or soft).
Loss-Sensitive Plans
Loss-sensitive workers’ compensation plans are also audited at the end of the policy term like a guarantee-cost policy; however, they provide insureds with the opportunity to have their insurance costs more directly related to their own losses during the policy period. As a business grows, it may want more control over its cost and opt to retain part of its losses for a better premium rate.
There are several types of loss-sensitive plans available. One such plan, for example, is a large-deductible program whereby the insured pays a portion of each loss up to the deductible amount, with the insurer responsible for losses in excess of the deductible. The insurer pays the cost of a claim as it comes due and is then reimbursed by the insured for each claim up to the deductible retention. A policy can also have an aggregate limit, which is the maximum amount an insured will have to pay for losses. Additionally, the insurer will require collateral in the form of cash, letter of credit, or bond on large-deductible plans to ensure insureds can pay the claims.
With a loss-sensitive plan, the insured is taking a calculated risk that its risk management, loss control, and claims management efforts are going to meet or exceed its historical loss experience and outperform similar companies in its industry. The expectation is that the premium savings in choosing a higher deductible will exceed that of the claims costs in a given policy year. The insured, if successful, will experience increased cash flow and be incentivized to continue to implement ongoing loss control and return-to-work programs in an effort to continue to mitigate losses and reduce claims costs.
There are some drawbacks involved with a loss-sensitive plan, though: financial security (collateral) is required; numerous years of high-deductible policies may aggregate collateral to the point that it can deplete line of credit availability; timing of claim reimbursements are unpredictable; and there’s a risk of large, unpredictable losses, especially if no aggregate deductible applies.
Manchester Specialty Programs provides workers’ compensation insurance solutions for the home care, allied health, and human/social services sectors. For more information about our solutions, please call us toll-free at 1-855-972-9399.