Workers' Comp Analysis and Plan Comparison Guaranteed Cost Plans
Which One is Right For You?
These web pages are designed to help describe and evaluate the various mechanisms available to provide workers' compensation benefits.
In an ever-changing marketplace, it is important to know what the options are and how they either do or do not fit your needs, expectations, experience and/or exposures.
The different options addressed are:
- Guaranteed Cost
- Retrospective Rated Plans
- Deductible Plans
- Captive Programs
- Self-Insurance.
Guaranteed Cost
By far, the most common workers' compensation plan is a policy written on a guaranteed cost basis.
This means that the carrier sets the rate for the account, based on their classifications, and that rate remains for the policy period regardless of the insured's individual loss experience.
The premium charged covers all of the costs associated with losses and expenses.
Some programs may include a provision for dividends, but that is not the norm. This is pure insurance.
You pay a premium; the carrier pays the losses.
Most accounts are on a guaranteed cost basis because it is too difficult to accurately predict losses. On these accounts, the risk is eliminated.
Certainly, accounts under $100,000 in annual premium belong in a guaranteed cost plan.
Even with the best accounts, a large, fortuitous loss can ruin loss experience. It is most important to be able to accurately budget for workers' compensation costs, without the risk of paying more.
A loss experience for an individual business will impact their premium in future years, but not in the current year.
Other accounts that benefit from guaranteed cost are those that have inconsistent loss experience from year to year.
This makes it difficult to predict losses, and the effect of losses can be leveled out over time.
There are downsides to guaranteed cost plans. The cost during the policy year is generally higher because the carrier takes all of the risk and pays all of the expenses.
When the year ends, your obligation is done. You pay the same amount when you do well, so there is no immediate reward for good performance.
You are affected most greatly by the whims of the marketplace, for better or worse.
For most accounts, though, avoiding the risk of paying additional premium in a bad year out-weighs the disadvantages.
Advantages:
- Fixed cost
- All inclusive
- No risk involved
- Higher policy year costs
- No savings on good years
- Subject to market whims