Many California businesses are desperately seeking rate relief in California’s workers compensation market. Rates continue to escalate during this hard market where insurance carriers are either pulling out of certain class codes, increasing rates, not writing business with ex mods in excess of 125% or pulling out of California altogether.
For businesses that are paying over $200,000 in premiums per year it may be time to evaluate alternatives to the traditional workers compensation policy. A Loss Sensitive Rating Plan gives you the opportunity to have your insurance costs more directly related to your own losses during a policy period. A traditional workers comp policy gives you a fixed rate with no opportunity for reward if your companies safety record or claims history performs well, but it also does not increase your premiums if your company’s claims history performs poorly.
The following plans provide a type of risk or reward opportunity that the traditional workers comp plan does not provide.There are a few different types of loss sensitive plans. A Retrospective Workers Compensation Rating Plan policy is one in which the final premium is based on the insured’s actual claims experience during the policy term. They generally have a minimum and maximum premium, with the final premium being determined by the actual claims the company incurs during the policy period. You pay a standard premium at the beginning of the policy year which consists of a basic premium plus loss projections that are based upon your past loss history. At 18 months from the inception of the policy, the insurance carrier values the losses and plugs them into a retro premium formula which determines the final premium. If your company performed well with little or no losses compared to the projected losses you would be eligible for a return premium. If your losses are higher than projected you may incur an additional premium. Generally the first calculation is performed 18 months from the beginning of the policy with subsequent calculations every 12 months until all losses are closed out. Most retro plans have a maximum premium limitation which limits the premium a business would pay. This is generally about 1.2 times the standard premium.
There are similar plans called Profit Sharing Plans which provide businesses with the opportunity to reduce insurance costs based upon their loss control, safety and claims experience. This type of program can provide immediate cash flow benefits and financial reward unlike other plans that may require more time for retrospective or dividend calculations that can run on for years beyond policy expiration. They generally will offer bare-bones pricing for loss free accounts, saving the company tens of thousands even hundreds of thousands of dollars on their workers compensation costs if they perform well. They generally have a limit or ceiling on the premiums. These plans are usually a three-year commitment and are not affected by experience modification changes or other guaranteed cost policy modification or differential factors. They generally have a guaranteed cost workers comp plan combined with a Profit Sharing Reinsurance plan which will vary between the minimum cost and a 3 year maximum cost. These type of plans can be very helpful to companies that may have had claims problems in the past but have implemented stronger safety and loss control measures which have decreased current and futures claims experience and expect their experience mod to climb over the next few years which will drive up the cost of a traditional workers compensation plan that cannot offer a reward for current performance until three or four years down the road when the experience mod will begin coming down.
Another alternative to the traditional workers compensation policy is a Large Deductible plan. This is a plan where you are responsible for reimbursing the insurance company for claims up to a certain dollar amount and the insurance company would then pay any claims that exceed the deductible. The average deductible on these type of plans is $250,000. In addition to the deductible you would pay a guaranteed cost premium which is credited based upon the deductible you choose. The larger the deductible the larger the credit given. Under this type of plan the insurance company takes care of all claims and then collects from the insured for loss payments the insured is required to pay under the deductible chosen. This template generally requires an escrow account and a letter of credit. Letter of credit is held in the event that the insured is unable to pay claims under their deductible level since the insurance company is still responsible for paying the claims the insurance carrier can then access the line of credit to provide claim payments.
If you would like more information on these type of plans or would like more information on workers compensation insurance please contact our office.