Advantages and Disadvantages of a Retrospective Workers’ Compensation Plan
Part two of a three-part series on alternative workers’ compensation programs. In case you missed it, here’s part one on large deductible programs.
Retrospective, or retro, rating plans are sophisticated rating programs where the final workers’ compensation premium paid is based in some fashion on the actual losses incurred during the policy period. These plans are complicated and many times used as an alternate funding mechanism.
When implemented and managed properly, these plans can be a valuable tool for controlling the total cost of a workers’ compensation program. If not used or managed properly, this type of plan can lead to costly overpayment of premium, expensive legal disputes and litigation between the insurance carrier and employer.
There are several different types of workers’ compensation retrospective rating plans, but we’ll focus on the two most common: Incurred Loss Retro and Paid Loss Retro.
Incurred Loss Retro Plan: The Incurred Loss Retro plan is probably the most popular due to the lower set-up cost. It’s typically reserved for staffing companies with premiums in excess of $200,000+.
Paid Loss Retro Plan: Paid Loss Retro plans are reserved for larger clients. It’s difficult to attract insurance carriers and costly to set-up. These plans are usually reserved for those clients paying premiums in excess of $1,000,000.
How do claims impact a Workers’ Compensation Retrospective Rating plan?
Claims, and just as importantly, claim handling by the carrier and insured have an enormous impact on the retro and the ultimate premium an employer will pay. Remember, the whole idea around a retrospective rating plan is that the insured is responsible for paying the claim cost, which is determined by an annual recalculation of the retro after the development of losses for the policy period in question. So, this type of plan is all about the claims. It cannot be stressed enough that proper claims handling must occur.
Who should consider using a retro plan for workers’ compensation funding?
Retrospective rating plans work best for these types of accounts:
- Financially flexible
- Claims frequency experience
- Valid, consistent claims data available for analysis
- Above average claims experience
What are the advantages for an employer?
- Flexible rating options and plan design
- Creates a strong loss control incentive
- Provides an excellent cash flow possibility
What are the disadvantages?
- Potentially the most expensive option if loss experience is poor during the retro period
- Could create a problem for the accounting and budgeting teams if the plan is not fully understood
- May lead to large annual cost of risk fluctuations
- Often requires high collateral and audited financials
- Poor claims handling can create higher costs
To learn more about Workers’ Compensation insurance and the right plan for your staffing organization, contact a member of the ‘A’ Team.
- Going Retro with Your Workers’ Compensation Program
- Making the Leap to a Loss Sensitive Workers' Comp Program
- Workers' Comp Collateral, What Is It Good For?
- 7 Steps to Effective Workers' Comp Claims Management
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