Deductible Programs can serve to reduce Workers’ Compensation costs for companies with sound safety and risk management practices in place.
Whether you’re transitioning to a Large Deductible Workers’ Compensation program or you’ve been on one for many years, there are far more considerations than simply managing your claims cost. It’s important to understand the various components of the program and what your broker should be focusing on when negotiating your renewal, as not all Large Deductible Programs are structured the same.
Some elements are cash flow implications versus a difference in ultimate cost, but all should be carefully considered when making a program decision:
- Basic / Deductible Premium Factor – This is the fixed insurance expense that includes the cost of insurance for claims exceeding your deductible level, the carrier’s reinsurance, and operating costs of the carrier. This factor will remain consistent for the policy term and will not change based on losses.
- Composite Rate vs. % of Manual Premium – It is important to understand how your fixed cost will be determined at the end of the policy term. Some carriers use a blended rate per $100 of payroll, while others use a percentage of manual premium. Using the latter, the state mix and class codes ultimately run factor into the cost whereas the distribution for a composite rate does not matter. This is an important consideration when setting your accrual net rates.
- Deductible Level – As the amount of retained risk increases, the fixed cost of your program should decrease since you’re taking on a greater amount of the primary exposure. An analysis should be performed at various deductible levels to see if the fixed costs savings at a higher level outweighs the expected cost of claims in the additional loss layer.
- Minimum – Most large deductible programs contain a minimum premium requirement. This means that if you run less payroll than expected, you’re still responsible for the initial estimated fixed cost premium amount. You should be aware of your minimum cost. This consideration is vital if you intend to sell your business during the policy year. Know how your costs will be determined if your policy does not run its full term.
- Maximum – If you want sleep insurance, an aggregate loss limit can be built into the program for an additional cost. This will provide a guaranteed maximum cost for your program, otherwise your costs are theoretically unlimited.
- Loss Conversion Factor vs. Per Claim Fee – How are your claim handling fees determined? A loss conversion factor (LCF) is a percentage applied to your incurred claims, while a per claim fee charges a flat amount per indemnity claim, medical claim or notice only. An analysis should be done to determine which method is most beneficial given your expected loss level, number of claims, and types of claims.
- Managed Care Savings Charges – These additional claims handling costs are oftentimes overlooked and not disclosed during the decision process, but they could amount to tens or hundreds of thousands in hidden costs to you.
- Claims Handling – Are claims administered by the carrier or is a third-party administrator (TPA) used? If using a TPA, are you involved in the TPA selection?
- Paid vs. Incurred Deductible – Both options have different collateral, cash flow, and tax implications. Paid programs typically provide better cash flow, but greater collateral needs. Incurred programs result in lower or no collateral obligations, but cash flow is negatively impacted.
- Collateral – Evaluate the collateral requirement to ensure it is fair given your expected losses. Carriers accept different forms of collateral, some require a letter of credit, accept cash or even offer a depleting cash loss fund on an installment basis. Others will allow a surety bond to cover a portion of the collateral requirement. Consider if policy years stand independently or whether overall results are blended.
- Loss Development Factors – Factors applied to your incurred losses to project the ultimate exposure for a policy year. They decrease as claims mature and impact cash flow.
If structured correctly, a Deductible Program can serve as a cost-effective long-term solution for your Workers’ Compensation program.
Contact us to work with an MMA Advisor to determine if a large deductible worker’s compensation program is right for your business.
