Deductibles, Self Insurance and First Dollar Coverage?What is the best option?
When it comes to buying insurance there are a lot of decisions to make which can make the process a bit overwhelming for most. Insurance, like most purchases we make is a decision that has a variety of options to consider. For most of us this decision is based on a three things; Price, Coverage and Service. Is there more to the equation though?
Workers compensation in particular tends to be written on what we call “first dollar Coverage”. This means there is no deductible option and when a claim is filed the insurance carrier will pay claims without you having to first pay a portion before their on the hook. This is a nice policy to have as you don’t have to worry about funding a claim if that takes place, however depending on your premium amount and claims history you could be leaving a lot of money on the table with this option.
Generally when the premium is below $100,000 the benefits of a deductible are slim compared to the discounts offered by most carriers. However, if you have a a competitive market company who offers a quote compared to the fund this option might be worth considering. The savings could be much greater, so you don’t want to rule them out.
When a company starts paying in excess of $100,000 in premium per year this is when considering a high deductible option could be beneficial. This is mostly because that business will typically have an established insurance history and more opportunity to spread out risk. This allows for a better chances of savings. This is where a high deductible option can sometimes save you 20-30% off your premium, but this comes with the risk of you paying out more if claims develop frequently. Examples of the types of deductible plans would be an Aggregate deductible. This is where you pay the claims until the aggregate amount (Typically starting between 50-100k) then the insurance carrier picks up the tab there after.
The opportunity for savings in this business gets bigger and more creative as your premium grows. Once you are paying in excess of $250,000 per year in workers compensation premium you really need to consider alternative options besides first dollar coverage. The only exception is if you have uncontrollable claims history that cannot be corrected. If that is the case than this is a serious issue. This issue needs focus before considering alternative workers comp plans. If you’re not in this boat considering high deductible options are still an opportunity but the savings are not the best. At this point, self insurance is starting to sound appealing. The cash flow that gets tied up in claims reserves can be significant even though the savings can be great. The rewards are likely 5-7 years out. At this premium amount a Captive Self Insured Retro Plan is a great option for a company at this premium threshold or higher with the ability to control their claims. The best part about this plan is it essentially takes the rates out of the equation.
The Captive Self-insured Retro Plan Model we use at our agency is a 3-year plan. Many like this option because it locks in workers comp rates over a 3-year term. Since this is a retro plan, instead of having 1 set premium based on your payrolls, you will have a minimum and a maximum premium. This will change based on your claims development over the 3-year term. The minimum amount accounts for administrative costs for running an insurance company and having the claims handling in place. This plan can often offer premium savings in excess of 50% compared to first dollar coverage policies, if you perform well. The max premium will account for these same costs but give you a worst case scenario if claims get out of control. This allows for a conservative approach to managing risk while allowing the opportunity for maximized savings.
There are several variables to consider when selecting the best plan for your company. The Retro captive program I described is a good solution to consider for your company for the long term. If you would like to know more about it, any insurance agent should be able to discuss these options for your companies future and premium savings.