Workers' Compensation has evolved significantly since its earliest form of employer protection under English Common Law to its current system of state laws designed to protect both employers and employees. It has become a system of state enacted legislation to protect against lawsuits stemming from workplace accidents, coupled with a social insurance mechanism whereby coverage and benefits are mandated and costs cannot be passed on to employees.
Every state has a Workers’ Compensation law that requires an employer to pay certain benefits to an employee who suffers a work-related injury or disease, regardless of fault.
In exchange for such mandatory benefits, the employee foregoes the right to bring suit against the employer. However, today most states allow the injured worker’s family members to sue the worker’s employer because of a work-related injury. And while virtually every employer needs Workers’ Compensation insurance, benefits can vary by state, including the amount and duration of medical expense benefits, disability income benefits, rehabilitation benefits and survivor benefits for a spouse and dependents, as well as a burial allowance in the event of a fatal injury.
Rose & Kiernan will help find the right carrier for your needs and will sort through the myriad of compulsory state coverage laws and mandatory income benefits to find the carrier most suited to insure your Workers’ Compensation exposure.
Cost is an important consideration in the selection of an insurer and rating plan. Determination of an insurer’s pricing involves many factors, the most significant of which are expected losses and expenses. While premium is at the foundation of any rating plan, the specific rating plan being offered by an insurance carrier requires closer analysis before the ultimate premium cost can be determined.
These are the most common rating plans used. Guaranteed cost is a proactive rating plan in that the insured’s premium is computed at the beginning of the policy period and is not subject to adjustment in accordance with actual loss experience during the period. The policy is rated using estimated payrolls applied to rates developed by the insurance industry and adjusted with the individual risk’s experience modifier.
The premium determined this way might be further modified by the application of a premium discount, the use of small deductibles and flat dividend percentages (calculated regardless of the loss experience for the policy period).
Simply put, dividend and retention plans provide a return premium to the insured after policy expiration. Typically, sliding scale dividend and retention plans become payable only if losses are low. No penalties, other than loss of the dividend, are assessed when losses are high.
Sliding scale dividend plans (participating dividend plan) may be loss sensitive; that is, the percentage dividend will vary with the loss experience of a particular insured and the size of the insured’s premium. Although the exact point at which dividends are not paid varies from plan to plan and insurer to insurer, it is important to note that dividends are more significant at very low loss levels and tend to evaporate quickly as loss levels increase. Furthermore, dividends cannot be guaranteed and, theoretically, the insurer pays dividends out of underwriting profits.
Retention Plans are a variation of a participating dividend program. With this type of plan, the insurance carrier establishes a charge for its services stated as a percentage of premium. This is the retention factor, which recognizes the carriers fixed costs associated with acquisition, administration, loss prevention, claims handling, boards and bureau charges and profit.
Typically, under this plan, a loss conversion factor to cover unallocated loss adjustment expense is applied to incurred losses and then added to the retention factor. Accordingly, the dividend payable to the insured will be based upon the insurer’s retention and converted losses in relation to the premium paid in at policy inception.
For this reason, the loss conversion factor and retention factor become key to determine the differences in dividends payable in a multi-plan comparison.
While sliding scale dividend plans and retention plans are products usually available for Worker’s Compensation only programs, retrospective (retro) rating plans have been developed for application to Workers’ Compensation, Employer’s Liability, General Liability and Business Automobile coverages.
In principle, retro rating determines an insured’s premium at the expiration of a rating period on the basis of the insured’s actual losses during that period. Such a rating plan allows an insured to more directly determine insurance costs through the control of its own loss experience.
Similar to a retention plan, a retro also begins with a Basic Premium Factor, which is a percentage of the insured’s standard premium. This factor provides for an insurer’s expenses, profit and contingencies, but does not include loss adjustment or tax expenses.
Additionally, a Loss Conversion Factor (LCF) is set and applied to ratable losses to provide for unallocated claims and adjustment expense.
The Tax Multiplier varies by line of insurance and by state. As its name implies, it provides for state premium taxes.
The last elements that go into determining the retro formula are the Minimum and Maximum Premium Factors, described as percentages of an insured’s standard premium. The minimum premium places a limitation on the potential savings to the insured as a result of good loss experience, while the maximum premium places an upper limit on the effect poor loss experience can have on the premium calculation.
The flexibility these plans provide requires an agency well versed in understanding the advantages, disadvantages, intricacies and, sometimes not so subtle, differences in a multi-plan comparison. Rose & Kiernan is well suited to provide this type of analysis to make sure your program doesn’t place an onerous burden on your business when deciding whether a retro option is the best fit for your organization.
Deductible programs place responsibility for ultimate payment of loss amounts less than the deductible with the insured. The insurance carrier, however, usually adjusts claims below the deductible amount and seeks periodic reimbursement from the insured.
There are a number of advantages to this approach. First, the insured can reduce insurance premiums by selecting a high deductible. Secondly, cash flow benefits are realized by the insured since the insurer settles the loss and collects the deductible amount at a later date.
Of course, as with any program that involves a sizable transfer of obligations, there are certain considerations from an insured’s perspective. Specifically, what is the optimum deductible level for an insured? This can depend on several factors such as the frequency and severity of losses, the loss payout profile, the degree of loss predictability and the premium savings.
From a tax perspective, loss amounts less than the deductible are not insured. Therefore, premium taxes and other assessments are avoided on payments less than the deductible. However, loss handling expenses for losses within the deductible are considered premiums and consequently are subject to tax.
Of further consideration is whether or not to design an aggregate stop-loss feature into the program to avoid accumulation of deductible payments beyond the organization’s financial capabilities.
This mechanism, through cooperative safety, is an organized approach by similar businesses to isolate and solve common safety problems and, ultimately, reduce overall insurance costs. Generally sponsored by professional or trade associations, these safety groups can offer most lines of casualty, and sometimes property, insurance to its membership.
While normal underwriting standards are applied by insurers based on the combined experience and safety capabilities of the group as a whole, each member receives individually written policies subject to their own experience modifications. It is most common that all members have a common expiration date.
A safety group dividend plan is a net cost plan. In other words, total audited earned premiums are pooled, fixed costs, adjusted losses and any loss limitation charges are subtracted from this figure and the result is the safety group’s net cost.
The difference between the earned premium and the group’s net cost is available for dividends. Typically, dividends are allocated in the proportion of a member’s premiums to the total premiums of the group as a whole.
The key to lower costs in these plans lies in the prevention and reduction of losses. Therefore, safety becomes profitable by not only considering the human life factor, but also increased profit potential and reduced operating costs for the organization.
This type of program is a formal decision to retain risk rather than insure it. What distinguishes it from non-insurance or retention of risk through deductibles is the need for a financing plan or system and procedures to pay for losses as they occur. Funding can be through operating cash balances or through systematic payments into a special reserve fund.
Self-insurance is a risk management approach well suited for business risks with long-tail loss payout patterns, which maximize the cash flow benefits. The self-insured maintains loss reserves and, as a result, has full use and directive of those funds. However, regulatory requirements and qualification procedures vary from state to state. Additionally, tax deductible allowances for established reserves may not be available, depending on the current position taken by the IRS.
Self-insurance programs can either be self-administered, which will often require additional staffing, reporting systems, etc., or through a professional administrator.
Rose & Kiernan professionals are available to analyze your risk and determine if this type of program best suits your risk management needs.
A captive insurance company is an insurance subsidiary owned by an individual parent corporation or by a number of related or unrelated interests. Typically, it is an insurance or reinsurance company chartered in the U.S. or offshore for the purpose of insuring or reinsuring primarily the owner’s own exposures.
Captives can take many forms, i.e., pure captive, association captive, group captive or rent-a-captive. The common thread is that this type of approach is commonly used in connection with the sponsorship or ownership of an insurance company on behalf of one interest or a group of interests.
Cash flow benefits are maximized because unused reserves accumulate earnings for the owners. Proper design and structure offshore may afford tax advantages as compared to a self-insured program. However, there are numerous complexities and expenses, which must be considered when considering the formation of a captive insurance company.