As a business grows, so too may its frustration with “Traditional” workers’ compensation plans. Many insurance agencies and businesses alike rely on traditional – or guaranteed cost – structures for workers’ compensation insurance solutions. In many cases, these policies suit businesses. While there are many advantages, they do have drawbacks that make them undesirable for medium and large companies. “For larger businesses, guaranteed cost programs are not always the best fit, and they could find significant savings in looking into alternative workers’ compensation products,” says Phil Fleming, PMC Regional Vice President.
Workers’ Compensation Alternatives
Loss sensitive workers’ compensation programs can help businesses effectively manage their total cost of risk, improve cash flow and achieve better claims outcomes for business and employees. Due to the benefits, these programs have become increasingly popular within recent years.
There are different types of loss sensitive workers’ compensation insurance products, including:
- Deductible plans
- Retrospective rating plan
- Retention plan
- Sliding-scale dividend plan
The specifics within each policy will vary, but they all share a common trait – the insured shares the risk with the insurer. In return, the business gets a discount on the premiums. Deductible plans in loss sensitive workers’ compensation come in two basic types: small deductible plans and large deductible plans. The former is where the amount per claim is relatively low, such as $1,000, and the latter is where the amount per claim is typically $25,000 or more. “Typically, companies that are committed to workplace safety, with strong safety cultures and are in solid financial positions are the ones that benefit most from loss sensitive plans,” says Phil.
Under these types of plans, the insurance carrier or a Third Party Administrator (TPA) takes care of all claims and then collects from the insured for loss payments the insured is required to pay under the deductible limit chosen. Typically, this requires an escrow account and a letter of credit.
Depending on the specific situation of the organization, a loss sensitive workers’ compensation program may provide several potential benefits over a guarantee cost program.
Traditionally, a captive is an entity created by a company or group of companies to provide insurance to its own (non-insurance) related companies.Captives are typically formed in order to meet the risk management needs of its owners or members. Ensuring those needs are met, the owners – who are also the principle insureds – control the routine operations and processes of managing their insurance program.
Captives have numerous advantages beyond the personalization of coverage. Businesses that choose to form captives may find a reduction in and/or stabilization of costs, as their expenses are no longer dictated by the retail insurance market pricing. Companies are also able to capitalize on tax deductions/savings, greater control over claims handling, incentives for loss control, and no longer subject to commercial carriers’ rate making policies. Cash flow benefits tend to be maximized because unused reserves accumulate earnings for the owners of the captive.
Captives can be a valuable and strategic risk management resource, but they are not the right approach for every organization. Depending on organizations’ risk tolerance, internal controls to manage exposures and claims, a captive could ultimately cost more than traditional insurance. If your company is considering a captive or another alternative option, talk with your insurance broker first.
At PMC Insurance, our workers’ comp experts are available for consultations, advise, and finding the best workers’ compensation options available. Talk to us about customized workers’ compensation solutions for your clients. Contact us today at 781-449-7744 or [email protected].