A Deductible Workers’ Compensation program is an insurance coverage option that enables an employer to pay a reduced premium for retaining a portion of each loss. Deductibles are typically categorized into three groups: small ($250 – $7,500 specific retention level), intermediate ($10,000 – $100,000 specific retention level), and large ($100,000 up). Deductibles can be written on a per- claim/claimant or per-occurrence basis. The difference between these two specific deductible retentions is, one is per claim or claimant. The other deductible retention is based on an accident or occurrence.
For example, let’s say an employer’s policy has a $2,500 deductible, with four employees working in a trench and the trench collapsed injuring all four. Under a per-claim deductible, the employer would be obligated to pay a maximum of $10,000 since there are four claims/claimants, each having a $2,500 deductible retention. Under a per-occurrence deductible, the employer would be obligated to pay a maximum of $2,500 since this was a single event or occurrence that caused all four employees’ injuries.
Under a Workers’ Compensation Deductible policy, the insurer pays 100% of claim costs as they come due. The employer is then billed monthly for the portion of each claim’s bills that were paid in the prior month. Once the specific deductible retention is met, the insurance carrier pays all future payment on that claim. For example, let’s say an employer has coverage written with a $2,500 deductible, and an employee is injured with the initial medical treatment bill of $5,000 paid by the insurance carrier. The insurer will pay the $5,000 and bill the employer the next month for $2,500 of the $5,000. Once the employer pays the $2,500 bill, their obligation is met for that claim.
Based on the historical data, an employer should analyze the specific deductible retention options and the number and cost of losses that would be retained at each deductible level. The higher the deductible, the larger the reduction in premium.
Some employers may like the premium savings a deductible can provide but are not comfortable or in a position to retain the open-ended liability. For these employers, a policy aggregate limit can be added as an option. The aggregate limit caps the total amount an employer may be obligated to pay, regardless of how many claims occur and their cost within the deductible retention. For example, an employer has coverage with a $5,000 deductible retention and opted for a $100,000 aggregate limit. During the policy term, the employer has 25 employees injured with a total claim cost under the $5,000 deductible retention of $300,000. The employer will only pay $100,000 of the $300,000. This is due to the $100,000 aggregate cap.
An aggregate limit is an option that may be worth considering as part of any deductible option. It is a relevant part of the risk benefit analysis when considering deductibles.
4 Factors for Evaluating Financial Feasibility of Workers’ Compensation Deductibles
Employers along with their insurance agent or broker should perform a financial analysis to determine whether a Deductible Workers’ Compensation program makes sense. The financial analysis should take into account the following:
- Expected losses: Utilize predictive modeling to evaluate the employer’s expected cost of claims within the selected deductible retention based on historical losses and payroll.
- Expected or planned changes in operations and growth: The employer should evaluate the impact on losses based on potential changes to their operations.
- If payroll growth is expected, expected losses should be adjusted based on payroll projects. The expected loss should be adjusted to reflect the increase in exposure. The increase in expected loss will vary depending on the classification code(s) driving the payroll increase (i.e., office/clerical payroll as opposed to machinery manufacturing payroll).
- Any planned change in operation should also be evaluated. If an employer is expanding into another state, purchasing a competitor’s or suppliers’ operations, or starting a new business operation, the expected change should be reflected in the analysis.
- An employer should also consider the impact of outsourcing high-hazard operations or jobs, which may significantly reduce exposure, expected loss and actual losses.
- Collateral requirements: The exposure for an employer will be based on the loss pick and the deductible level the employer chooses and will also serve to determine the insurer’s collateral requirement. Insurers require collateral in the form of cash, a letter of credit, or bond to cover the credit risk of the insurer. The collateral amount is intended to cover the insurer’s credit risk exposure and is based on the expected losses under the deductible retention for the policy term. It is important for the employer to understand that the collateral will need to be kept in place for several years. The insurer will typically release the collateral once the employer’s financial obligation has been met on all claims or, if the policy has an aggregate, the aggregate limit has been met.
- Financial strength of the employer is a key factor in the deductible decision: The employer should consider likely and worst case monthly deductible reimbursement costs and the impact potential on cashflow, as well as how carrying the deductible liability will impact the employer’s growth and reinvestment capability.
Although the decision for an employer to retain risk through a deductible policy is a big one, many employers that move into intermediate and large deductible programs never move back to guaranteed cost coverage. This is for two main reasons: they have more control or at least real input into the management of their claims; and the reduction in total cost of Workers’ compensation insurance. In fact, employers are much more likely to move from deductible programs to self-insurance, a captive program, or a combination of the two. These programs provide the employer greater control over the claims management process and more significant reduction in premium cost.
Why Prescient?
Prescient National offers a full range of deductibles in the states in which we are licensed. We can write policies with $250 deductibles up to $1 million (depending on state limitations). In addition, our average cost per claim over the last 12 years is 38% below the industry average. An employer looking to take on risk wants to partner with a carrier that has a strong track record in reducing claims expenses. We also can provide excess coverage for employers who elect to self-insure. We can provide fronting paper and TPA services to employers who own a captive insurance company or are considering owning a captive.
