Workers Insurance
Workers' compensation is system that provides cash benefits to employees who are injured on the job or who become disabled due to an on-the-job injury or illness. In the worker's compensation system, employees give up their right to sue an employer for injuries from work-related accidents in exchange for receiving benefits for all work related accidents or injuries, regardless of fault.
All states have worker's compensation laws, and, while the procedures and benefits of applying payments may vary, workers compensation is considered to be part of the expense of doing business.
Managing this expense continues to be one of the most challenging issues facing businesses today.
There are primarily three ways a business can insure itself against worker's compensation exposure.
1. Primary Workers' Compensation Insurance
2. Self-Insurance Trust
3. Individual Self-Insurance
Primary Workers' Compensation Insurance
This type of insurance imposes a set amount of premium based on an employer's exposure to risk due to the amount of payroll by class code and their experience factor or Mod.
While additional factors may play a part in the underwriting process these are the primary factors in determining the amount of premium an employer will pay.
The advantage to this type of coverage is, that regardless of the amount of losses the insured may have during the policy period he will only pay the prescribed amount of premium, unless there is an increase in reported payroll during that same period.
However if the insured's losses are considerable or if carriers determine their class codes undesirable they could be faced with non-renewal or a considerable increase in premium as we have experienced in many cases over the past 18 months.
A self-insurance trust is a method by which small to medium sized employers can pool their worker's compensation liability with other employers.
The trust is the collective assumption of risk by a group of employers usually within the same industry or members of the same association. Employers spread out their worker's compensation risk among all the members of the trust. Each member pays a premium to the trust. All losses and expenses for the trust are paid from the collected premiums.
The success and proper functioning of a self-insurance trust comes from its member's commitment to reducing work place accidents and the efficient administration of its claims and general operations.
Advantages of a Self-Insurance Trust
A self-insurance trust can offer a small to medium sized employer potential cost savings. If premiums exceed the losses and expenses of the trust, with approval from the State Division of Workers' Compensation, the trust can refund the surplus to its members in the form of dividends. This surplus would otherwise be profit for an insurance carrier in a primary cost program.
A member of a self-insurance trust also has greater control over its worker's compensation cost. A board of trustees comprised of members of the trust is responsible for all the operations of the trust. Members of a trust have a sense of ownership and a shared motivation for cost reduction.
A trust may offer its members active loss prevention programs and services. These programs provide employers with better work environments and help improve the trust's profits through reduced losses.
Trust members can actively participate in case management, which may help reduce the overall cost of a claim.
A trust helps its members stabilize insurance cost. For the most part the fixed cost associated with self-insurance trust do not follow the premium ups and downs that can be experienced with traditional insurance.
Disadvantages of a Trust
In the event the trust fails to properly assess its members to meet the trust's losses and expenses, the trust may collect additional assets from the members to correct the deficit. With an insurance policy, the employer is not responsible for payment of losses that exceed its premium.
Each member is jointly and severally liable to all other members of the trust for all liability under the states worker's compensation law.
To help insure the solvency of the trust, the states worker's compensation division has strict requirements that must be met by the trust and its members.
Exposures outside the state where the trust is located must be insured through a traditional worker's compensation policy or an acceptable alternative.
Managing worker's compensation exposure continues to be one of the most challenging issues facing businesses today. Many organizations turn to self-insurance as a means of exercising greater control over their programs and controlling associated worker's compensation expenses.
Self-insurance is a carefully designed risk management mechanism in which companies elect to pay for their own losses up to a predetermined level. Most companies purchase excess insurance to cover losses, which exceed this amount. Typically, the level of losses a company assumes is based on the amount the company could afford to pay without affecting its financial stability. Because of the predictable nature of losses, worker's compensation readily lends itself to self-insurance.
In most states, companies must undergo an extensive qualifying process to become a self-insured. If the company can demonstrate the financial wherewithal to pay future losses, meet the states qualification requirements, and display an adequate service plan, self-insured status is typically granted. Because of the increased administrative responsibilities associated with establishing and maintaining a self-insurance program, companies typically apply for self-insurance in those states where they have significant payroll exposure.
Self-insurance requires the company's management team to take on a more active roll than most insurance plans. In addition to meeting state qualification requirements, companies, which elect to self-insure their losses must provide the services necessary to support the plan and control expenses. This includes loss control, claims management, and program administration. There are a number of potential advantages associated with self-insurance plans.
Self-Insurance Advantages
Maximum program control
Immediate savings from favorable loss experience
Cash flow benefits
Investment income opportunities
Elimination of certain insurance expenses
Customized services program
Strong incentive to control losses
Long-term strategy
Self-Insurance Disadvantages
Significant cost associated with adverse losses
Budgeting difficulties due to loss fluctuations
Increased administration
No certificate of insurance
Dependence on excess insurance and bond market
Potential increase in commercial coverage cost
Financial information may become public
Long-term commitment
Learn more about self-insurance
As the workers compensation market continues to harden and as insurance companies raise prices (NCCI stated a 15% increase in premium from 1999 to 2000, a sharp contrast to the 3% annual drop in premium over the previous two years) and tighten underwriting criteria. Self-Insured Trust and Individual Self-Insured Programs become very viable options in controlling worker's compensation cost.
