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.
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.
Private Client Insurance Services 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.
Compensation Traditional Insurance Solutions
Determining an insurer's
pricing involves many factors. 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.
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
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.
Compensation Alternative Insurance Solutions
Retrospective rating plans allow an insured to more
directly determine costs. 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
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.
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. Private Client Insurance Services 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
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.
Safety becomes profitable by reduced operating costs. 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.
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.
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
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
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.
Insurance Services professionals are available to analyze your risk and
determine if this type of program best suits your risk management needs.
available from standard carriers.