In the context of workers’ compensation insurance within a Professional Employer Organization (PEO), there are two different approaches to managing insurance coverage: PEO master policy and carve outs.
A PEO master policy is a comprehensive workers’ compensation insurance policy that covers all employees of the PEO, including leased employees working at the client location. Included in the definition of master policy, are policies for clients in Multiple Coordinated Policy (MCP) states, which require clients to have coverage in their individual names, though still part of the master policy.
Benefits of a master policy:
- Simplified administration: With a PEO master policy, the administrative burden of managing workers’ compensation insurance is reduced for client companies. The PEO takes care of policy administration, premium calculations, and claims management on behalf of the client companies.
- Pooling of risk: The claims experience of all client companies within the PEO is combined. This pooling of risk can help stabilize premiums for individual client companies, as the overall claims experience of the PEO may be more favorable than that of any single company.
- Potential cost savings: In some cases, a PEO master policy may offer cost savings for smaller client companies. By leveraging the combined purchasing power of multiple companies, the PEO may be able to negotiate more favorable insurance rates and terms.
Carve outs, also known as separate client policies or individual policies, are separate workers’ compensation policies obtained in the clients’ own name. Instead of being covered under the master policy, the PEO manages each client company’s policy separately, while still usually providing the same risk management and claims advocacy services a client would find under a master policy.
Benefits of a carve out:
- Individualized coverage: Carve outs provide flexibility to customize a client company’s workers’ compensation policy to meet their specific needs, including coverage limits, deductibles, and additional coverage and endorsements based on their unique risk profile.
- Claims experience control: Each client company has potentially more control over its own claims experience. A positive claims experience can lead to lower premiums, and client companies can implement their own risk management strategies to reduce workplace accidents and injuries.
- Insurance carrier selection: Clients can select from a variety of workers’ compensation carriers, potentially securing specialized coverage with carriers and risk management tools suited to the client’s industry.
- Competitive advantage: Depending on the individual client company’s claims history and risk profile, carve outs may offer cost savings. Client companies with better-than-average claims experience can secure more competitive insurance rates by separating their claims history from others in the PEO, which can be particularly advantageous for larger client companies with substantial payroll and bargaining power.
While carve out policies may offer distinct benefits, they often come with higher cost of administration.
Ultimately, the decision to choose between a PEO master policy and carve outs should be based after careful consideration of factors such as the client company size, risk profile, claims history, and specific insurance needs. Consulting with insurance professionals and legal advisors can help determine the most suitable approach within the PEO arrangement.
For more information on carve out policies, contact a Marsh McLennan Agency (MMA) advisor.
