A large deductible plan provides the same workers’ compensation insurance coverage as a guaranteed insurance plan. In fact, a deductible option is a guaranteed insurance plan with the addition of a special deductible endorsement.
A deductible program is designed for large employers who have the capacity to self-insure part of their workers’ compensation losses. The size of deductibles for these plans generally range from $100,000 to $1,000,000 per occurrence.
The reason to move to a large deductible plan is, in short, a reduction in premium. Owners take a calculated risk that loss control and claims management efforts are going to meet or exceed historical loss experience and outperform similar companies in the industry. The expectation is that the insurance premium saved by choosing a higher deductible will exceed that of the claims costs in a given policy year.
How does this plan affect your handling of claims?
Not by much on the surface! The insurance company makes all payments as it would under a standard workers’ compensation policy. You’d file a claim with your broker or insurance company, and they’ll assign an adjuster to manage the case like a guaranteed cost plan. The insured then reimburses the insurer in paid losses up to deductible limit.
Adding aggregate stop-loss to cover excess claims
The aggregate stop-loss is very similar to an excess or umbrella policy for your liability insurance. This coverage ensures that catastrophic claims (specific stop-loss) or numerous claims (aggregate stop-loss) don’t upset the financial reserves of a self-funded plan. Aggregate stop-loss protects you against higher-than-expected claims. If total claims exceed the aggregate limit, you’d be reimbursed by the stop-loss insurance carrier.
The purpose of collateral
In a typical insurance arrangement, the insurer collects an upfront premium and allocates a specified percentage to future claims, operating expenses and profits. In a large deductible program on the other hand, the insurer requires a much lower premium because the claims costs that fall under the deductible will be reimbursed by the insured.
Advantages of a large deductible workers’ comp plan
- More cash flow than most other fully insured or alternative risk programs
- Increased market availability or number of carriers willing to underwrite staffing
- Increased incentive for implementing loss control programs
- Advantages of self-insurance without having to obtain regulatory approval or incurring high start-up costs
- Easy access and exit
- Possible tax savings
Disadvantages
- Financial security is a requirement
- Numerous years of deductible policies may aggregate collateral to the point that it can deplete available line of credit
- Unpredictable timing of claim reimbursements
- Risk of large, unpredictable losses, especially if no aggregate deductible applies
When considering moving to a large deductible plan, a company should develop annual operating budgets that project the direct and allocated costs of its expected claims, including excess insurance. Structured and monitored correctly, a large deducible program can provide you with greater control, reduced long-term total cost and a significant competitive market advantage over your competitors.
Looking for more information on what a large deductible plan has to offer? Learn more here.
