We’ve published articles looking at the current tough market and what it means for the staffing industry. The first step in the process of selecting the best insurance program for your company is to “Analyze” the situation. This involves reviewing the alternatives that are available. It is important that one not wait until 30 days before the renewal to review the options. Waiting this late to evaluate the alternatives will exclude some of the options, as they are time sensitive. 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 you have time to review the alternatives without the pressure of your expiration date. This gives you and the operator – administrator of the program the ability to determine if the program will be the most beneficial for your company.
First, we need to define worker’s 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 that employee from suing the employer. Required in all states except Texas. Employer’s liability is insurance that covers common law claims against the employer arising out of an employee’s injury or illness. It is also used to provide provisional coverage in monopolistic states where the state offers the only form of workers’ 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 most beneficial include cost, payroll and/or loss sensitivity, return potential, ownership/influence, and level of service.
Transfer of risk/guaranteed cost…It is the most well-known form of workers’ compensation insurance, especially for the lay person. This is basically where you contact an agent/broker and request basic coverage. This coverage is the assigned risk market or the voluntary market. This carries the most expensive premiums, but can be more affordable cash flow since no investment is required. It is only payroll sensitive, which means the premium is developed by multiplying payroll times 100 times fees and then the modifier and any debits or credits. Your losses during that policy period are not taken into account when determining the premium, hence the term guaranteed cost. Likewise, there is no potential return of the premium for the positive loss experience. You have no ownership or influence over the terms of the program and the level of service is standard, meaning it is not tailored to the individual policyholder.
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. It will typically incur surcharges, debits, and have higher fees than any other program. The assigned risk group is intended for newly created companies or companies involved in high-risk operations. It is difficult for a staffing company to stay competitive with coverage on assigned risk. The voluntary market can offer a beneficial scenario, especially in a soft market like the one 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 marketplace options are still available, but they are few and far between and are reserved for companies with higher premiums and a clean underwriting track record. Most insurers are not willing to offer this program to staffing companies today, as they require policyholders to retain at least some risk. The credits are definitely in the past.
Deductibles/Retros…are popular with carriers in today’s market, as they believe the insured has an incentive to control losses in these programs. While each uses payroll to develop the down payment premium, both deductibles and retrogrades are sensitive to losses. Deductible schedules imply that the insured pays the first amount X of each claim. For example, a $100,000 deductible would mean that the insured would self-pay each claim until it reaches $100,000, where the company would pick up the payments. Typically, the carrier pays for claims from first dollar and then bills the insured to maintain the reliability of proper reporting, claims handling, etc. Retros work similar to Guaranteed Cost on the front-end. The insured pays his annual premium during the year. At the end of the policy period, a defined adjustment date is established and the premium is assessed or reimbursed to the insured according to the terms defined in the retro policy.
The initial costs of these programs are somewhat lower than the guaranteed cost and can be considerably lower in the long run if losses are controlled. However, if the losses go south, these types of programs can be disastrous for policyholders. The aggregates have increased in the hard market, which means that the loss limit that the insured must pay is much higher. Caution should also be exercised when evaluating adjustment periods for retro programs. Consider both the time to first check and the extent to which the carrier can continue to make readjustments. It’s becoming common for 30-month initial reviews, which means you can’t receive a return for positive loss experience until a year and a half after the policy year expires. This is important because many companies rely on performance to help finance next year’s premium. We recommend requesting reviews 18 months from inception when possible.
captives…They are often the best option for staffing companies with standard premiums between $250K and $750K. The premium for a captive is based on your loss experience. The premium cost is generally as good or better than the options listed above. An investment is required for a captive program, which is what prevents some companies from selecting this option. There must be a long-term perspective when considering this option. Since you are sensitive to losses, a strong risk management program is critical to ensure that you not only do not exceed your loss fund, but also that you maximize your investment return potential. A captive grants you ownership in their insurance program, which requires a commitment to participate rather than just being insured. The results are excellent, as captives experience the best level of service, the most competitive and predictable premiums, and the protection of market conditions.
The hard part is getting into a captive program. This is the option you need six months to research and prepare for. 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 vendors, 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 it Moving Forward If you don’t, you won’t be able to maximize the rewards of a captive program and could be driving your company’s demise. A well-managed captive is a treasure, but it’s not right for every business. Please spend as much time as possible evaluating this option before moving forward.
self insurance…It is the highest risk of all the options. Many businesses will not be qualified to participate in this option. Each state has mandatory criteria for self-insurance. Only the state of Texas allows a business to “disregard the law” and not be insured or qualify for self-insurance. Doing so removes your company from “exclusive remedy” protection, which means an employee can sue your company when injured on the job. If the self-insurance option is considered, it will be necessary to take out a franchise policy. This will cover any catastrophic losses that may be experienced. Failure to obtain this coverage can result in the bankruptcy of the business because no one can absolutely prevent such a loss. In the past, these policies have been competitive, but due to the toughness of the market and the frequency of catastrophic claims in recent years, they are now not as easy to find. A qualified consultant should be used before exercising this option. The risks are too high to avoid evaluating all the possibilities when choosing to self-insure. With the exception of large corporations, staffing companies will typically decide that the exposures for this option are 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 inform you of the alternatives out there and allow you to further consult and assess whether your current program is best for you. Remember that analysis and preparation are the most important steps on the road to evaluating your workers’ compensation options in a difficult market.
