Making the Leap to a Loss Sensitive Workers’ Comp Program
One of the more common questions I get from staffing owners is when to change from a guaranteed cost workers' compensation program to a loss sensitive program. Here's an excerpt from an article I wrote for Staffing Industry Analysts' Staffing Stream blog.
Purely based on the market itself, now is the perfect time to consider changing your workers' comp program. However, the decision also needs to be based on your company’s situation. If you can answer yes to the questions below, then you need to give a loss sensitive program some serious consideration:
1. Do you have a strong risk management program?
You should never entertain a loss sensitive workers’ compensation option unless you have a strong risk management program. This means you should employ at least one person whose background and primary responsibility are to administer the handling of your claims and/or influence the safety at your customer’s worksites. The contracts with your clients should also outline which party is responsible for potential situations and should not include wording that says that the staffing company is responsible “regardless of fault”.
2. Are you comfortable making a conservative estimate for your losses in the next policy term?
The better the risk management program, the more predictable your workers’ compensation losses are going to be. Yes, there can be unusual claims or situations that shouldn’t recur. However, a good risk management program will keep these situations to an absolute minimum. If you’re having several unusual claims every policy term, then you’re not effectively managing your workers’ compensation program. A predictable loss estimate will make your decision to move from guaranteed cost to a loss sensitive program much easier.
3. Are you in a financial position to make the change?
For most light industrial staffing companies, workers’ compensation costs are the second highest overall cost. You must assess your ability and desire to take more risk in your insurance program. Loss sensitive programs elevate the risk you’re assuming, so the good years will be very rewarding, but the bad years could really sting. Over a five year period, we typically find that in three of the years, you perform about as expected; in one year, your results will be worse than expected; and another year will be better than expected. For some, the ultimate savings are worth the volatility.
4. Do you have better than average financial statements that are reviewed or audited by your CPA?
Insurers will often require reviewed or audited financial statements in order to quote a loss sensitive plan. If the expense of changing from internal or consolidated statements to reviewed or audited statements is a major factor in considering a loss sensitive plan, then most this plan is not for you.
Loss sensitive workers’ compensation programs include retrospectively rated programs, deductible programs and captives. Minimum premiums for captives are typically $150,000-$200,000 (significantly more for retros and deductibles), so you don’t have to be a large agency in order to consider one of these programs. If you’re comfortable taking some risk and want to start to take control of your costs, you need to consider loss sensitive options.
- Assurance University: Risk Management Overview Webinar Recording
- Going Retro with Your Workers' Compensation Program
- New Year, New Insurance Options
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