Utilizing Guaranteed Cost for Workers Compensation
Workers compensation insurance coverage is a critical component of a companys day to day operations. That being said, it is important to evaluate all of the different types of programs available.
Guaranteed cost is the most basic option when it comes to insuring against employee injury, illness and disease in the workplace. A guaranteed cost plan is the most widely available and commonly purchased workers compensation program. Premiums are based on payroll, specific classification codes and premium rates per $100 of payroll. In exchange for the payment of premiums, the insurance company agrees to pay for all work-related injury, disease and illness claims.
At the onset of the policy, a staffing firm submits to the carrier an annualized payroll projection broken down by state and classification code. Various factors impact the premium, such as experience modification factors, discretionary underwriter credits/debits, premium discounts and a variety of other state-specific taxes, surcharges and fees. Once the annual policy term has expired, the carrier conducts a payroll audit to determine what that actual audited premium will be for that policy term. If payroll is higher than anticipated, an additional premium will be due. If payroll is lower than anticipated, a return premium or refund will be issued back to the staffing firm.
Guaranteed cost coverage is generally written for companies seeking first dollar coverage without a deductible, or firms that prefer more of a predictable insurance premium with less risk tied to actual loss experience.
Advantages of Guaranteed Cost Programs
- Pay a standard amount of premium even if losses exceed that amount
- Simplest plan to budget for and administer
- Low experience modification factor translates into lower premiums
- Minimal risk associated with the plan
Disadvantages of Guaranteed Cost Programs
- No immediate cash flow benefit for good claims experience; these plans are not adjusted due to losses that occur during the policy term
- High experience modification factor translates into higher premiums
- Claim services cannot be unbundled to a third party administrator
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