The nature and needs of running a staffing firm demands that owners and risk managers address a number of unique liability exposures. This requires a delicate balance of controlling costs and transferring risk. This article will review insurance options and important aspects that staffing business owners should consider when seeking to secure the right-fit workers’ compensation insurance, at the best price, based on risk transfer preferences.
When first venturing into the insurance coverage arena, most businesses begin under a guaranteed cost option. It’s a simple “set it and forget it” approach to a workers’ compensation program. This simply means that you pay a flat fee (or rate) upfront for a specific amount of coverage. It’s often preferred because it allows a total transfer of your workers’ compensation risk to the insurance carrier along with a predictable cost. However, this predictability comes with a significant price. Guaranteed cost is typically the more expensive option because the insurance carrier needs to protect themselves from losses you may have and while still remaining profitable.
In a deductible plan, the insured is responsible for reimbursing the insurer for claims up to a certain dollar amount and the insurer is responsible for paying claims in excess of that deductible amount.
The maximum amount of risk retained by an insurer per life is called retention. The retention level for deductible plans varies (and so there are small deductible plans and large ones). In addition to paying for all losses under the deductible amount, the insured must pay a deductible premium. That is determined by multiplying the guaranteed cost premium by a deductible credit which depends on the retention level that the insured chooses. The larger the retention level, the larger the deductible credit given, resulting in a smaller premium. In short, the more risk you hold onto, the less you may have to pay in premium.
Retrospective (Retro) or Loss Sensitive
A retrospective or loss sensitive plan is defined as an insurance method in which the final premium is based on actual loss experience during the policy term. The final premium is determined by a formula laid out in the insurance contract and is typically subject to a minimum and maximum premium.
A standard premium is paid at the beginning of the policy year, which includes a basic premium plus loss projections determined by the insurance carrier. At the end of the policy year the insurance company values the actual losses. If the standard premium is greater than the developed retro premium, then the insured will receive money back. If the standard premium is less than the developed retro premium, then the insured will have to pay the amount of the difference to the insurer.
Retro programs are ideal for larger companies that are able to shoulder additional risk, yet can be confident in their ability to keep claims below the threshold at which premiums would go up.
A captive insurer is generally defined as an insurance company that is wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer’s underwriting profits. A captive insurance company is not a suitable option for all insureds or for all situations
There are lots of different captive arrangements in the marketplace today. One type is called a single parent (or pure) captive, which is owned and controlled by a single parent organization and is formed as a subsidiary of that organization. These are appropriate for very large organizations that can easily handle a $3-4M loss.
There are certainly plenty of options available, but if you choose to manage this area of business yourself, it’s important to have the right level of knowledge and expertise needed to effectively administer these types of insurance programs. For many staffing companies, it’s proven worthwhile to outsource managing workers’ compensation insurance and other business risk areas to back office partners like People 2.0.