By Jordan Markuson
A large deductible plan provides the same workers’ compensation insurance coverage as a guaranteed insurance plan. In fact, a deductible option is a guaranteed insurance plan with the addition of a special deductible endorsement.
A deductible program is designed for large employers who have the capacity to self-insure part of their workers’ compensation losses. The size of deductibles for these plans generally range from $100,000 to $1,000,000 per occurrence.
Why would I want a large deductible plan?
In short: reduction in premium! You take a calculated risk that your loss control and claims management efforts are going to meet or exceed your historical loss experience and outperform similar companies in your industry. The expectation is that the insurance premium saved by choosing a higher deductible will exceed that of the claims costs in a given policy year.
With this in mind, a company should develop annual operating budgets that project the direct and allocated costs of its expected claims, including excess insurance.
How does this plan affect your handling of claims?
Not by much on the surface! The insurance company makes all payments as it would under a standard workers’ compensation policy. You’d file a claim with your broker or insurance company and they’ll assign an adjuster to manage the case like a guaranteed cost plan. The insured then reimburses the insurer in paid losses up to the aggregate stop loss limit.
Aggregate stop-loss
The aggregate stop-loss is very similar to an excess or umbrella policy for your liability insurance. This coverage ensures that catastrophic claims (specific stop-loss) or numerous claims (aggregate stop-loss) don’t upset the financial reserves of a self-funded plan. Aggregate stop-loss protects you against higher-than-expected claims. If total claims exceed the aggregate limit, you’d be reimbursed by the stop-loss insurance carrier.
The purpose of collateral
In a typical insurance arrangement, the insurer collects an upfront premium and allocates a specified percentage to future claims, operating expenses and profits. In a large deductible program on the other hand, the insurer requires a much lower premium because the claims costs that fall under the deductible will be reimbursed by the insured.
Advantages of a large deductible workers’ comp plan:
- Significant cash flow advantage over most other fully insured or alternative risk programs
- Increased market availability or number of carriers willing to underwrite staffing
- Increased incentive for implementing loss control programs
- Increased incentive for implementing return to work programs
- Advantages of self-insurance without having to obtain regulatory approval or incurring high start-up costs
- Easy access and exit
- Possible tax savings
Disadvantages
- Financial security required
- Numerous years of deductible policies may aggregate collateral to the point that it can deplete line of credit availability
- Unpredictable timing of claim reimbursements
- Risk of large, unpredictable losses, especially if no aggregate deductible applies
Structured and monitored correctly, a large deducible program can provide you with greater control, reduced long-term total cost and a significant competitive market advantage over your competitors.
About the Author: Jordan Markuson
Jordan Markuson is a Risk Management Consultant at Assurance who focuses on the staffing industry. Jordan strives to continually educate, advise and tailor insurance programs that provide both corporate protections and uniquely controlled premium costs for his clients. He’s a passionate entrepreneur who intimately understands insurance from both sides of the table. Jordan received his Bachelor of Science degree in business from Indiana University Kelly School of Business. He currently holds his Chartered Property Casualty Underwriter (CPCU) designation.
