The Basics Behind Loss-Sensitive Workers’ Compensation Programs

workers compensation

There are a variety of coverage options available for Workers’ Compensation insurance, with the most commonly written form a Guaranteed Cost policy. The premium with a Guaranteed Cost policy is based on estimated payroll, broken down into rating classification codes. A factor known as the experience modification is applied to the premium calculation. The experience modification is a rating factor based on an employer’s historical claims experience compared to that of the average employer in the same or similar industry. A Guaranteed Cost policy is audited at the end of the term to evaluate whether the estimated payroll and classifications are correct. They are then adjusted based on actual payroll of each rating classification to determine the ultimate premium for the year.  

Other types of programs available are known as Loss-Sensitive Workers’ Compensation programs. These programs provide an alternative solution to a Guaranteed Cost policy. Loss-Sensitive policies are audited at the end of the policy term like a Guaranteed Cost policy.  However, the ultimate cost of the program factors in the cost of claims that occur during the policy term. Here we will go into the basics of how some of these programs are designed (in future articles, we will offer a more in-depth discussion on each of the options). 

Incurred Loss Retrospective Rating Endorsed Policies

The premium in a Retrospective Rating Endorsed policy (“Retro” as the name implies) is determined retroactively by factoring in the losses that occurred during the policy term. The policy is audited at the end of the policy term as with a Guaranteed Cost policy. The difference is that the ultimate premium is not determined by the audit. Instead, it’s determined by applying the factors on the Retro endorsement to the audited premium and the incurred claims from the policy term. Since Workers’ Compensation claims can, in some cases, take years to be settled, the Retro endorsement accounts for this by providing adjustments to the premium over set intervals. Typically, the first is six months from the end of the policy term, at 12-month intervals for three years, based on the employer’s claims experience during the policy term. If the insured’s incurred losses are low for the period, the policyholder would receive a refund. Of course, more losses would result in having to pay a higher premium. While the premium changes over time, based on adjustments to claim reserve and claims being settled, it is important to note, that the Retro endorsement has a minimum and maximum premium charge to provide a predictable premium range.

Intermediate and Large Deductible Programs

In a Deductible Workers’ Compensation program, unlike in a Retrospective program where the premium is impacted and adjusted over time based on losses post-audit, the ultimate premium charge for the policy is determined at audit. The Deductible policy provides a credit (reduction in premium) based on the size of deductible (dollar amount of each loss that is retained). The insurer pays the cost of a claim as it comes due, and then is reimbursed by the employer for each claim up to the deductible retention. Deductibles are typically billed monthly until the individual claim deductible is met.  A policy can also have an aggregate limit, which is the maximum amount an insured will have to pay for losses. For example, let’s say an insured purchases a Deductible policy with a $500,000 deductible and a $1.5 million aggregate limit. The employer pays for each loss up to $500,000 but no more than a total of $1.5 million. 

An insurer will require collateral in the form of cash, letter of credit, or bond, on Large Deductible plans to ensure insureds can pay the claims. Even for some Retrospective plans collateral may be required. Collateral is required to cover the credit risk of the insurer because the insurer is obligated to pay the claim regardless of its ability to collect deductible payments from the insured.

Excess Insurance/Self-Funded Plans

Excess policies are only written for companies that are approved by a state’s Department of Insurance to self-insure, and are not required to buy Workers’ Compensation coverage in that state. A self-insured company buys an Excess insurance policy to limit its cost on individual claims. This limit is referred to as the policy’s “attachment point.” An Excess policy can also provide aggregate limits. The insurer is only obligated to pay for losses that cross a specified dollar amount of the attachment point on the policy. In addition, under an Excess policy the insurer is not responsible for claims management. Therefore, the self-insured company is responsible for hiring a third-party administrator (TPA) to manage claims. The TPA services can be provided by the same insurer offering the Excess coverage or a separate third party, but in either case, it is a separate agreement from the insurance contract. Since the Excess insurer has no obligation to pay any claims below the attachment point, there is no collateral required by the insurer. 

Benefits of Loss-Sensitive Programs

Insureds can make better use of their money and can choose to put additional resources into stronger hiring practices, as well as safety and training for better claims management and outcomes. Employers are more engaged when it comes to the safety of their employees, as they are bearing more of the risk and are more invested in reaping the cost benefits that a Loss-Sensitive program offers. 

Prescient National works with insurance brokers and employers to help determine an insured’s capacity to take on risk and to evaluate which Workers’ Comp program is the best fit. We look at all of the options available to provide the most effective product based on the business’s loss history and current risk management capabilities. Some employers, for example, may have had a poor loss history, but after visiting their operation or facility, we see firsthand what changes have been made to improve their losses. We may, for example, determine together with the insured and broker that the business can handle a higher retention level based on what it’s currently doing, or that a Retrospective plan would make a good fit. We can also assist in implementing effective risk management and claims management programs to help control an employer’s losses and therefore, the premium costs.

Our creativity and flexibility as a partner distinguish us as we find a Workers’ Compensation solution designed for the insured’s needs. As the organization grows and changes, Prescient National has the products to meet the business’s evolving needs. 

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