WC Plans Vary, But Loss Control Rules

Whether self-insuring or transferring all risk, buyers must lower claims costs

Second Of Two Parts

Since claims drive the ultimate cost of any workers' compensation program, preventing injuries and managing those that occur is the best game plan for risk managers at all companies, regardless of size, complexity or type of coverage.

Buyers have numerous coverage options to choose from. The choice can be tricky--plans that seem attractive at the beginning of a policy term may turn into nightmares for companies that are unable to really manage claims frequency and severity.

Workers' comp is a statutory requirement, which means that insurance covering this exposure mirrors a state's legal requirements for employers falling within the law, as stated in the first part of this article last month. (See NU, Sept. 5, page 33.)

Self-insured programs follow the same course. They provide medical and wage-loss benefits to employees covered by the workers' comp law of the state in which they work.

The beauty of a guaranteed cost program is its predictability and ease of implementation--a risk manager simply pays a set premium. However, incentives to keep claims from occurring and to actively manage those that do occur diminish in a guaranteed cost program.

Ultimately, a business relying on guaranteed cost coverage may experience more employee injuries because there is no incentive to work to actively prevent them. This can lead to a higher modification factor and thus fewer insurers willing to offer guaranteed cost coverage.

Dividend plans basically are guaranteed cost plans that offer the potential for a dividend reward if the business has better-than-expected claims experience. Dividend plans typically base claim experience on the losses of a particular group to which the insured belongs or to the individual insured business.

Since they have an upside in the potential for a dividend but no downside in the form of the buyer having to pay in additional funds if claims are higher than expected, dividend plans typically are reserved for those businesses that have better-than-average claim experience.

Thus, a company that is written on a guaranteed cost plan that actively manages its loss prevention and claims may eventually qualify for a dividend plan. Dividends are not guaranteed and are paid only if declared by the carrier's board of directors, but typically they will be paid to companies that have good claims experience.

Incurred loss retrospective rating plans are one step further toward self-insurance. They reward companies that have better-than-expected loss experience and penalize those with worse-than-expected loss experience during the retrospective term.

Under a retro, the insured business pays the policy premium to the insurance company at the beginning of the term. As time elapses, the premium is adjusted upward or downward as claims develop and mature. This continues until all claims are closed--a time frame that may stretch for years into the future.

Typically, the premium is adjusted based on the financial measure of incurred losses, which include claims that have been paid as well as the amounts set aside or reserved to pay future claims.

Large deductible plans are similar to retro plans except they bill the insured as claims are paid. Claim reserves typically are used to establish the amount of collateral that is required to secure the program. The initial amount that a business with a large-deductible plan pays in typically is substantially less than the full estimated standard premium, which is collected under an incurred loss retro program.

However, the business that's insured on a large deductible plan must post collateral--typically an irrevocable letter of credit and/or surety bond--for the difference between the amount deposited up front and the standard premium. The company also sets up an account out of which claims are paid.

The business must replenish the claims account as claims are paid so that it is maintained at a certain pre-determined level. Collateral is based on estimated losses and the insured's financial condition--a safeguard against a company walking away from paying claims that may exist years into the future.

Some companies may find the collateral requirements burdensome, especially since collateral is required year after year, with letters of credit frequently stacking atop each other.

Self-insurers also must post collateral and bonds to guarantee the payment of future claims. Frequently cited upsides to these types of plan are the enhanced cash flow and decreased fixed costs.

There are many variations on each type of financial plan, depending on market conditions, business conditions and claims-management expertise.

Regardless of what a financial plan is called, however, risk managers should take time to compare the various options (see sidebar) to better determine the best type for their operations.

Diana Reitz, CPCU, is managing editor of FC&S Online, the National Underwriter Company's online source for coverage interpretation and analysis.

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Head: What Should Buyers Look For?

When reviewing financial plans to cover workers' compensation risks, risk managers should concentrate on five basic areas:

o Amount of insurance purchased.

o Cash-flow arrangements.

o Fixed costs.

o Amount of risk transferred to the insurance company.

o Amount and form of collateral required to guarantee that claims will be paid.

With this list, a buyer can determine, for example, that a guaranteed cost program provides 100 percent insurance coverage, no cash-flow opportunity (unless installment billings are offered), the highest fixed costs, 100 percent of the risk transferred to the insurer, and no required collateral.

Such plans are typically offered to smaller businesses that have average or above-average past claim experience, or to types of businesses that statistically have fewer worker injuries, such as office exposures.

Quotebox, with mug:

"Plans that seem attractive at the beginning of a policy term may turn into nightmares for companies that are unable to really manage claims frequency and severity."

Diana Reitz

Special Reports /

WC Plans Vary, But Loss Control Rules

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