Workers’ Compensation: From Traditional Insurance to Alternative Risk Solutions
Workers’ Compensation is a significant cost for most companies and depending on the size and risk profile of each business there are various ways for employers to obtain coverage. Caitlin Morgan provides a wide range of Workers’ Compensation solutions – from traditional coverage to alternative risk solutions that include self-insurance, captive programs and more. Following are some of the comp solutions we provide:
Guaranteed Cost: The most common among rating plans, an insured’s premium is calculated at the beginning of the policy period and is not subject to adjustment based on actual loss experience during the period. The policy in a guaranteed cost policy is rated using estimated payrolls applied to rates developed by the insurance industry and adjusted with the individual risk’s experience modification factor. The premium can 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).
Retention Plans: Here, an insurer establishes a charge for its services (acquisition, administration, loss prevention, claims handling, boards and bureau charges and profit) stated as a percentage of premiums, which is the retention factor. Under this plan, typically a loss conversion factor to cover unallocated loss adjustment expense is applied to incurred losses and then added to the retention factor. The dividend payable to the insured will be based upon the insurer’s retention and converted losses with respect 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 when comparing plans.
Retrospective Rating Plans: These are sophisticated rating programs designed where the final premium paid is based in some fashion on actual losses incurred during the policy period. This allows an insured to better directly determine insurance costs through the control of the business’ own loss experience. Similar to a retention plan, a retro plan 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 provides for state premium taxes and varies by state. The final 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.
Large Deductible Programs: Deductible programs place responsibility for ultimate payment of loss amounts less than the deductible with the insured. The insurance company, however, usually adjusts claims below the deductible amount and seeks periodic reimbursement from the insured. The advantages to this approach include the insured’s ability to reduce insurance premiums by selecting a high deductible. Secondly, cash flow benefits are realized by the insured, as the insurer settles the loss and collects the deductible amount at a later date. A business needs to determine its optimum deductible level, which can depend on several factors such as the frequency and severity of losses, loss payout profile, the degree of loss predictability and premium savings.
Self-Insurance Programs: This type of program involves an insured retaining risk. It requires 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 ideal for business risks that have long-tail loss payout patterns, which maximize the cash flow benefits. The self-insured client maintains loss reserves and, as a result, has full use and directive of those funds. Regulatory requirements and qualification procedures vary from state to state. Self-insurance programs can either be self-administered, which will often require additional staffing, reporting systems, etc., or through a professional administrator.
Captive Solutions: A captive insurance company is an insurance subsidiary owned by an individual parent corporation or by a number of related or unrelated interests. Typically, it is an insurance or reinsurance company domiciled in the U.S. or offshore for the purpose of insuring or reinsuring primarily the owner’s own exposures. Captives can take many forms – from single parent to group captives and rent-a-captives, among others. This type of approach is commonly used in connection with the sponsorship or ownership of an insurance company on behalf of one interest or a group of interests. Cash flow benefits are maximized because unused reserves accumulate earnings for the owners. Proper design and structure may afford tax advantages as compared to a self-insured program. There are, however, numerous complexities and expenses, which must be considered when considering the formation of a captive insurance company – all of which can be discussed with Caitlin Morgan’s captive experts.
We would be happy to discuss our comp solutions in greater detail and design a program that is the right fit for your clients. Contact us at 877.226.1027.