By Meaghan Tyndale-Williams, Risk Advisor
For most large businesses, workers’ compensation is their most expensive insurance coverage. A guaranteed cost program—which is the traditional route—sets the annual premium at the beginning of each policy year. Premiums remain the same regardless of the amount or cost of claims during the policy period.
With a guaranteed cost program, insurance companies set aside money to pay your claims in an investment pool. They are banking on paying out less in claims than what was set aside so that the money stays in the pool earning interest and growing each year. That is how they stay profitable.
Many large companies do not realize that they, too, can enjoy these benefits. If you are paying more than $500,000 per year for workers’ compensation premiums and have low loss frequency, you should seriously consider looking into alternatives that offer the possibility of large financial gains.
Traditionally, a captive is an entity created by a company or group of companies to provide insurance to its own non-insurance-related organizations. In this instance, you are essentially setting up your own insurance company.
The first step is meeting with a broker to have them do a feasibility study, which means looking back on your losses for the last five years. If you are a business that’s controlling your losses, with few to no claims, then you would most likely be the perfect fit for this situation.
Your broker will work with a captive manager who will determine how much money will be required to be put into a loss fund used to pay your projected claims, hire a third-party administrator to take care of your claims, and contract with a risk management team.
Each year, you will set aside money for claims, and if your losses do not exceed the fund, that money eventually goes back to your company and you make a profit.
Captives have numerous advantages beyond the personalization of coverage. Businesses that choose to form captives may find a reduction in and/or stabilization of costs as their expenses are no longer dictated by retail insurance market pricing. Companies are also able to capitalize on tax deductions and savings, gain greater control over claims handling, have incentives for loss control, and avoid being subject to commercial carriers’ rate-making policies. Cash flow benefits tend to be maximized because unused reserves accumulate earnings for the owners of the captive.
One thing to keep in mind is that this option requires at least a five-year commitment because it requires annual lookbacks.
Large Deductible Solution
This type of insurance provides the same coverage as a traditional guaranteed plan but with the addition of a special deductible endorsement.
This program is for clients who are okay taking on more risk, as the company is responsible for claims up to the deductible amount. In exchange for paying claims under the set deductible amount, the company receives a large up-front discount on their premium.
This option typically requires an escrow account and a letter of credit. The letter of credit is held in the event that the insured is unable to pay claims under their deductible level since the insurance company is still responsible for paying the claims. The insurance carrier can then access the line of credit to provide claim payments.
There is no reason your company should be spending more annually than it has to. At JGS, our workers’ compensation experts are available for consultations, advice, and finding the best workers’ compensation options available for you and your employees. We are here to answer your questions, contact us today.