Understanding Workers’ Compensation Coverage Options
You have several options when it comes to securing coverage for your workers’ compensation program. In this session at RIMS 2023, Mark Walls, Vice President of Client Engagement at Safety National, explained the pros and cons of fully insured, high-deductible, self-insured, and captive programs as well as the opt-out option in Texas.
Overall, workers’ compensation covers accidental injuries in the workplace, repetitive trauma injuries occurring over time, and some diseases contracted in the workplace. It does not typically cover Acts of God, injuries not caused by job duties, ordinary diseases, intentional injuries, and injuries sustained traveling to or from the workplace.
There are several funding options that employers can consider when purchasing workers’ compensation for their organization. As you review options, it is important to note that one size does not fit all when it comes to selecting a workers’ compensation program. Sometimes it takes a state-by-state analysis to determine the most appropriate path forward. It is best to work with your broker to review options and associated costs.
Guaranteed Cost Workers’ Compensation
What is it?
- The employer pays a premium. The insurance carrier pays and administers the claims.
- Fixed costs.
- Very little administrative effort from the employer.
- Usually effective for smaller-to-mid-sized businesses.
- The employer has no claims control.
- The carrier profits from the employer’s good performance.
- It is not an ideal structure for larger employers.
Variations / Exceptions:
- Dividend programs and retrospective rating variations are available in some states, which can provide some degree of reward for good claims performance.
- Ohio, Washington, Wyoming, and North Dakota operate state funds that have a monopoly on writing guaranteed cost workers’ compensation. In those states, employers’ only other option is self-insurance.
Options for Large Employers:
- There are guaranteed cost options for large employees, which is best suited for businesses that are large enough to retain risk, but their financial structure does not allow for it. This can include private equity firms or those that operate with franchise models. In this case, the coverage is priced like a risk management account.
- The employer retains some of the risk with the insurance carrier attaching above a retention.
- Advantages can include a greater influence over claims handling, which helps the employer benefit from good risk control performance.
- Disadvantages can include the additional administrative burden this option potentially puts on the employer.
Self-Insured Workers’ Compensation
- Self-insurance is offered in all 50 states in the U.S.
- It does require approval from each state – typically determined by the Division of Workers’ Compensation, who will review financial thresholds and collateral requirements.
- Most states require the employer to purchase excess self-insurance coverage (stop loss).
- With this structure, the employer retains risk up to an agreed upon self-insured retention (SIR).
- The employer also hires a third-party administrator (TPA) to handle their claims.
- This option offers the lowest insurance cost, but includes higher administrative complexity for the employer.
Large Deductible Workers’ Compensation
- This option is not available in all 50 states.
- It is structured as a guaranteed cost policy with a deductible endorsement.
- Collateral for claims below the agreed upon retention is held by the insurance carrier and the employer hires a TPA to handle their claims.
- The carrier has compliance risks.
- Overall, there is less of an administrative burden on the employer when they select this option for their program.
- Captives are a variation of deductible covers, where the insurance carrier “fronts” coverage and is reinsured by the employer’s captive.
- This structure requires an up-front cash outlay from the employer to set up their captive.
- There can be associated tax advantages.
- The carrier attaches at a higher layer, which can mean there is more complexity for employers with this option.
- Texas is unique in that workers’ compensation is not mandatory in the state.
- Employers have the option to “opt out” of the state’s workers’ compensation program.
- If the employer opts out, there is no exclusive remedy (also referred to as the “grand bargain”) in which workers give up their right to sue in civil court for work injuries in exchange for a no-fault system that provides indemnity and medical benefits.
- Many employers replace workers’ compensation with an ERISA-defined benefits plan.
- This option is good for some industries, but bad for others.