We have published articles looking at the current market and what it means for the staffing industry. The first step in the process of selecting the best insurance program for your business is to “Analyze” the situation. This involves reviewing the available alternatives. It is important that one does not wait until 30 days before renewal to review the options. Waiting so late to evaluate the alternatives will exclude some of the options, as they are urgent. Choosing an insurance program is a process that must begin no less than 120 days prior to renewal. Actually, the optimal scenario is to start six months early so that you have time to review the alternatives without the pressure of your expiration date. This gives you and the operator’s program manager the ability to determine if the program will be the most beneficial to your business.
First, we need to define workers’ compensation insurance. Workers’ compensation is a type of no-fault insurance that pays both the wages and medical costs of an employee injured on the job and prevents the employee from suing the employer. Required in all states except Texas. Employer liability is insurance that covers common law claims against the employer arising out of an injury or illness of the employee. It is also used to provide temporary coverage in monopoly states where the state offers the only form of worker’s compensation. There are many different types of workers’ compensation programs, but they are all hybrids or modifications of four basic types of programs: risk transfer / guaranteed cost, deductible / retro, captive, or self-insured. Factors that determine which program is the most profitable include cost, payroll and / or sensible losses, potential for return, ownership / influence, and level of service.
Guaranteed risk / cost transfer …It is the most commonly known form of workers’ compensation insurance, especially for the laity. This is basically where you contact an agent / broker and apply for basic coverage. This coverage is the assigned risk market or the voluntary market. This carries the most expensive premiums, but the cash flow can be more affordable as no investment is required. It is only payroll sensitive, which means that the premium is developed by multiplying the payroll by one hundred by the rates and then by the modifier and the debits or credits. Your losses during that policy period are not taken into account when determining the premium, hence the guaranteed cost term. Similarly, there is no premium return potential for a positive loss experience. The insured has no ownership or influence over the terms of the program and the level of service is standard, which means that it is not customized for the individual insured.
The assigned risk is the insurer of last resort, also known as the state fund. This end of the spectrum gives the insured the least amount of control over their insurance program. It is also the most expensive. Typically, you will incur a higher surcharge, debits, and fees than any other program. The assigned risk group is intended for newly created companies or those involved with high-risk operations. It is difficult for a staffing company to stay competitive with coverage at the assigned risk. The voluntary market can offer a beneficial scenario, especially in a soft market such as that experienced in the mid to late 1990s. Credit is often given and the premiums can be low enough that the other programs are not worth the risk. However, this condition does not exist in today’s market. Some voluntary market options are still available, but they are few and far between and reserved for companies with higher premiums and a clean underwriting history. Most carriers are not willing to offer this program to personnel companies today, as they require the insured to at least retain some risk. The credits are definitely in the past.
Deductibles / Retros …They are popular with operators in today’s market, as they believe that the insured has an incentive to control losses in these programs. While each uses payroll to develop the down payment premium, both deductibles and retroactive are sensitive to losses. Deductible programs involve the insured paying for the first X amount of each claim. For example, a deductible of $ 100,000 would mean that the insured would pay each claim himself until it reaches $ 100,000, where the insurer would take over the payments. Typically, the carrier pays claims from the first dollar and then bills the insured to maintain the reliability of proper reporting, claims handling, etc. The Retros work similarly to the guaranteed cost up front. The insured pays his annual premium during the year. At the end of the policy period, a defined adjustment date is established and the insured is assessed or the premium is reimbursed according to the terms defined in the retro policy.
The initial costs of these programs are somewhat lower than the guaranteed costs and can be considerably lower in the long run if losses are controlled. However, if losses are reduced, these types of programs can be disastrous for policyholders. The aggregates have increased in the hard market, which means that the limit of losses that the insured must pay is much higher. Caution should also be exercised when evaluating adjustment periods for retro programs. Consider both the time for the first review and the extent to which the carrier can continue to make adjustments. It’s becoming common for initial 30-month reviews, which means you can’t get your refund for positive loss experience until a year and a half after the policy year expires. This is important because many companies rely on profitability to help finance next year’s premium. We recommend requesting 18-month reviews from inception when possible.
Captives …They are typically the best option for staffing companies with standard premiums between $ 250,000 and $ 750,000. The premium for a captive is based on his experience of loss. The cost of the premium is generally as good or better than the options mentioned above. An investment is required for a captive program, which is what prevents some companies from selecting this option. There should be a long-term perspective when considering this option. Since it is sensitive to losses, a sound risk management program is critical to ensuring not only that you do not exceed your loss fund, but also that you maximize your potential for return on investment. A captive grants you ownership of her insurance program, which requires a commitment to participate rather than simply being insured. The results are excellent, as captives experience the best level of service, the most competitive and predictable premiums, and protection against market conditions.
The hard part is getting into a captive program. This is the option that takes six months to research and prepare. Get references and all available background information before selecting a captive. Talk to people both in the program and those who have worked with the program (such as suppliers, associations, etc.) Ask about the level of risk sharing that exists and make sure you understand every detail of how the captive works before committing to moving forward . If you don’t, you won’t be able to maximize the rewards of a captive program, and you could be scheduling your business out of business. A well-managed captive is a treasure, but it is not suitable for all businesses. Please take as much time as possible to evaluate this option before proceeding further.
Self-insurance …it is the greatest risk of all the options. Many companies will not be qualified to participate in this option. Every state has mandatory criteria for self-insuring. Only the state of Texas allows a business to “flout the law” and not have insurance or qualify for self-insurance. Doing so removes your company from “exclusive recourse” protection, which means that an employee can sue your company when they are injured on the job. If you are considering the self-insurance option, it will be necessary to obtain a franchise policy. This will cover any catastrophic losses that may be experienced. Failure to insure this coverage can result in company bankruptcy because no one can absolutely avoid such a loss. In the past, these policies have been competitive, but due to the tough market and the frequency of catastrophic claims in recent years, they are not so easy to find now. A qualified consultant must be used before exercising this option. The risks are too high to avoid evaluating all the possibilities when choosing to self-insure. Except for large corporations, staffing firms will typically decide that the exposures for this option are simply too large.
The above programs are not all inclusive. There are many derivatives of these, and you will want to speak with your agent / broker and / or consultant to determine the exact programs available to you and which option will be most beneficial to your business. This should at least make you aware of the alternatives that exist and allow you to further investigate and evaluate whether your current program is the best for you. Remember that analysis and preparation are the most important steps along the way to evaluating your worker’s compensation options in a tough market.