As its name denotes, a high deductible workers comp policy or program is a method of insuring workers compensation risk with the employer assuming some of that risk in a deductible of $100,000, $250,000 or even higher per claim, and an insurer taking the remaining risk on.
These types of policies are reserved for larger employers who would have a guaranteed cost workers comp policy around $300,000 or more. Guaranteed cost policies are what most smaller employers use to transfer all of their risk of workers compensation to an insurance company rather than assuming any potential liability themselves.
Why would an employer want to assume this much risk for workers compensation? The answer is simple, for an employer who has had good loss experience and is confident in their risk control systems, they know they can “beat the odds” and end up paying dramatically less than a fully insured guaranteed cost program.
Here’s how the basic mechanics of a high deductible workers comp plan works:
As an example, let’s take an employer has grown significantly over the past few years and now is facing a renewal premium of $500,000 for guaranteed cost workers compensation. Over the past five years the employer has done a good job in training their employees which is resulting in a low loss ratio and low experience rating modifier, and while they are getting all the possible discounts and credits in their policy the premium is still very expensive.
The employer’s insurance broker may suggest looking at a high deductible workers comp plan as an option and solicits various quotes to share with the client. We would recommend that before making a selection on what plan and what deductible to choose, the employer should engage an independent actuary and pay them a fee to develop a loss pick forecast which will help qualify any decisions on plan design and risk assumption.
Once that is done and the plan is selected, let’s assume that the employer chooses a $250,000 per claim deductible with an aggregate deductible (the total the employer will pay out of pocket in any one year for all claims) of $600,000. The premium for the policy goes from $500,000 down to $150,000. Now you may be saying – if the employer is taking on all that risk, why do they pay any premium! Well, the answer is that the insurer is still on the hook for any claims which may run over the per claim deductible or the aggregate, and they play two other important roles. The first is that they issue a policy which is required by statute and the second is that the insurer (in many cases) will be responsible for adjudicating or adjusting/paying for all the claims. When the insurer disburses money for claims, they bill the insured for the amount they pay. These three elements of the insurer’s role is why the employer still pays a premium.
Is a high deductible workers comp program right for you?
That depends on several factors. The greatest of which I believe is the confidence you have in your risk control program. If you feel like your injury rate is predictable, and you’ve got a good historical grip on claims then you may want to consider looking at this type of risk financing. The second factor is cash flow. If your company does not have sufficient free cash flow and cash reserves this could be a dangerous risk to assume more of. Again, if you have confidence in your risk control and confidence in your company’s cash flow then considering high deductible workers comp plan may be a good idea.
One last word.
If you do want to review your options, we strongly advise clients to get an independent actuary involved in the decision-making process. An actuary will give you credible guidance based on your history and their knowledge to be able to forecast what the future may look like. Without an actuary, you’re just guessing what option is best, based on a spreadsheet a broker may prepare for you.
Have questions? Want to learn more on how our CompControl360 and deep experience around workers compensation can help you make better decisions on insuring, controlling and managing workers compensation risk? Give me a call or drop me an email and let’s start a conversation.