Workers' Comp: Are You a Fair Weather Fan?
Recently, we’ve seen an increasing trend of staffing companies moving to large deductible workers’ compensation (WC) programs from a traditional guaranteed cost or first dollar structures. The primary motive for this change is the real potential to save premium on your program due to increasing WC costs. As with any plan, there are advantages and disadvantages. My goal is to help you make the right coverage decision for your staffing organization and any potential transitions as smooth as possible.
The first step in evaluating a large deductible program is qualifying whether or not you’re a good fit for this structure. On average, the cost benefits of moving to a deductible plan become evident when a staffing company is paying $750,000 in standard premium or more. While this can be a fairly loose metric, we see carriers typically follow this line of thinking. The reason behind it is fairly simple. At a certain point a carrier’s administrative costs will not directly correspond to an insured’s program size. A carrier needs to charge a set amount in order to be profitable. For an insured to capitalize on the cost benefits of a large deductible program, your WC program needs to be of sufficient size to offset the carriers’ administrative cost pass through.
While you’re taking on the additional risk of paying for claims within your deductible, the way the carrier’s insuring agreement is structured, the carrier is still ultimately guaranteeing the payment of all claims. Your deductible payment obligation to the insurance carrier then creates credit risk for the insurance company. As such, the carrier will ask for some sort of financial security from the insured. While there are different forms of security available, the requirement usually takes on the form of a letter of credit which can significantly erode your borrowing capacity. Additionally, this collateral requirement will stack year over year and can make it difficult to change carriers or program structures.
Another component in deciding whether a large deductible program is right for you is determining whether or not you have consistent or predictable historical losses. Taking on a large deductible when you have a loss history that fluctuates significantly from year to year can make it difficult to adequately predict what money you need to set aside to fund for the claims within your deductible. Large claim fluctuations can also make it difficult to choose the appropriate deductible level for your particular risk.
Having an established safety program can significantly help mitigate these fluctuations. If you decide to move to a large deductible program, any injury that’s prevented or minimized through safety initiatives is money you can save to spend on growing your business. Additionally, employees are generally more productive in a safe environment, especially when they have the opportunity to work with you to manage their own safety. Generally when you have a large deductible, the time and effort spent developing a robust safety program will pay dividends for years to come.
So if you’ve read all that and think a deductible is for you, or you’re still on the fence, here are some potential advantages of switching:
- Moving from a guaranteed cost program will result in a significant reduction in the fixed costs you pay your insurance carrier, which provides cash flow advantages over other risk transfer programs.
- You’ll be able to fully capitalize on a good loss year. Reduced claims equal more money you can apply to things that are important – like growing your business.
- Carriers are more likely to quote insurance programs for staffing companies when you’re sharing some of the overall risk. The more carriers that will write your WC program, the greater your buying power.
- Most carriers that offer large deductible programs are willing to unbundle the claims services. This allows you to select your own claim serving provider and further dictate your servicing needs.
When structured correctly, a large deductible plan can significantly reduce your total cost of risk which should be the ultimate goal of any risk transfer program.
At Assurance, we have the loss tools and resources to help you determine which plan is right for your staffing company. While choosing your program can be a risky business – it’s what we’re good at.
- Collateral Calculator
- Register for Bottom Line Impact: Workers’ Compensation Seminar (9/16)
- Going Large with a Deductible Workers’ Compensation Program
- Everything You Need to Know About Collateral Stacking
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