We have published articles looking at today’s 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 does not wait until 30 days before renewal to review options. Waiting this late to evaluate the alternatives will rule out 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 alternatives without the pressure of your due date. This gives you and the operator – program manager the ability to determine if the program will be the most beneficial for your business.
First, we need to define worker’s compensation insurance. Workers’ compensation is a type of no-fault insurance that pays both wages and medical costs for an employee injured on the job and prevents that employee from suing the employer. It is required in all states except Texas. Employer’s liability is insurance that covers common law claims against the employer arising from 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 most beneficial include cost, payroll and/or sensitivity to loss, 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 layman. 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 a more affordable cash flow as no investment is required. It is only payroll sensitive, which means that the premium is developed by multiplying the payroll by one hundred times the rates and then by 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. Similarly, there is no premium return potential for positive loss experience. It has no ownership or influence over the terms of the program and the level of service is standard, meaning it is not personalized to the individual member.
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. You will typically incur a surcharge, debits, and have higher fees than any other program. The assigned risk group is intended for start-ups 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. Credits are often given and premiums may be low enough that other programs are not worth the risk. However, this condition does not exist in the current market. Some voluntary market options are still available, but they are few and far between and are reserved for companies with higher premiums and a clean underwriting history. Most insurers are unwilling 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.
Deductible/Retro…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 down payment premium, both deductibles and retros are sensitive to loss. Deductible programs 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 take over the payments. Typically, the carrier pays claims from the first dollar and then bills the insured to maintain reliability for proper reporting, claims handling, etc. Retros work similar to the 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 losses go south, 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 used 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 30-month initial reviews, which means you can’t receive your positive loss experience return 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 their loss experience. The premium cost is generally as good as 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 loss, a strong risk management program is critical to ensure that you not only do not exceed your loss fund, but also maximize your potential return on investment. A captive gives you property 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 that you need six months to research and prepare for. Obtain 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 moving forward If you don’t, you won’t be able to maximize the rewards of a captive program and you could be driving the demise of your company. A well-managed captive is a treasure, but it’s not right for every company. Please spend as much time as possible evaluating this option before moving forward.
self-insurance…It is the biggest risk of all the options. Many companies 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 “challenge the law” and be uninsured and unqualified 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 option of self-insurance is considered, it will be necessary to take out an excess 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 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. With the exception of large corporations, staffing firms 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 tough market.