Workers' Compensation Payment Plan Explanations
While Workers' Compensation benefits are regulated by law, the variables involved in choosing the correct Workers' Compensation program for your dealership will include the level of claims handling and loss prevention services offered by the carrier, as well as the different pay plans available that will greatly affect your net cost and cash flow. The availability of these different pay plans may vary from state to state and will generally depend upon the size of your payroll. Following are the four most common plans:
Guaranteed Cost - This is essentially the agreement on the part of the employer to purchase Workers' Compensation insurance for a fixed annual premium (subject to payroll verification by audit) with full coverage for any claims that may occur during the policy period. This type of plan may be the only option available to smaller employers and is certainly an option to consider if you want to budget the cost with absolute certainty.
Dividend Plan - This type of plan is similar to the Guaranteed Cost plan as it relates to the certainty of the premium cost during the policy year and full coverage for all claims. The benefit of a dividend plan, is that it allows for a return of premium to you in the event that you have a low loss ratio for the policy period. The dividend amount is typically tied to your loss ratio and the potential returns will vary from one program to another.
An important factor to understand in such a plan, is when the dividends are scheduled to be returned. Most plans will schedule partial returns for set dates after the policy year expires. For example, six, eighteen, and thirty months after policy expiration are normal dividend return dates. Usually the sooner the return, the better. However, there is also a potential down side to early return dates. For example, claims that remain open on the early date of dividend evaluation can reduce the amount of your dividend. While a later date of dividend evaluation might reveal that all claims were closed out with minimal costs, allowing for a higher dividend return to you. Unless you have consistently few claims to be held in reserve year in and year out, it may be difficult to forecast which return schedule is best for you.
In addition, it is worth noting that some dividend plans are a contractual return of premium based only on your individual loss ratio, while other dividend returns, regardless of your loss ratio, must be approved by the insurers Board of Directors. In the later case, you need to consider their history of dividend returns. In any event, if you are looking for a plan with fully insured losses and the potential of a dividend return, this is the type of plan to consider.
Incurred Loss Retro - This plan offered by some carriers, is a hybrid of a dividend plan and a partially self- insured program. It is only offered to larger employers and provides the opportunity to qualify for a larger dividend return if you are willing to participate in claims payment in the event that you have a high loss ratio for that policy period. The plan will specify the amount of claims and resulting loss ratio that will trigger your responsibility to pay for subsequent claims for the policy period. It will also specify the maximum limit of your claims responsibility, after which your insurance again begins to pay for the claims. Depending upon your appetite for risk taking, a balance is struck between your desire to qualify for a larger dividend and the potential that you might at some point be required to shoulder some claims responsibility.
On this type of plan, the dividend return should always be contractually guaranteed and the return schedule is much the same as with a standard dividend plan. But of course, in those policy years with a high loss ratio, by the time your are required to participate in claims responsibility, your eligibility for a dividend return has expired. Still, this is a plan to consider if you have consistently low loss ratios and are willing to take some risk for a higher potential dividend.
Paid Loss Retro- This type of Workers' Compensation plan is as close as most larger employers are allowed to get and would want to get, to self-insurance. This plan has the potential to greatly reduce your premium pay in during the policy year. Your scheduled premiums are only a fraction of the amount that you would pay under the previously described plans. And, these premiums are used to purchase the services of a claims administrator and insurance to pay claims should you reach your maximum claims liability.
Under this arrangement, as claims occur, they are handled by the administrator and you are billed from the first dollar of claims activity for that policy period. Your claims responsibility ends should the claims activity reach a predetermined maximum limit at which time the insurance component of the plan begins to pay any remaining claims. The important factors to consider in a plan such as this, is the expected minimum premium pay in, if there should be no claims during the year, as well as your potential maximum premium, including your claims responsibility. This maximum will also be affected by a loss conversion factor and tax multiplier that are applied to paid claims.
To qualify for such a plan, an employer must show financial resources to meet the claims responsibility and this is usually accomplished with a letter of credit from their bank or a premium payment guarantee bond. Most dealers prefer a posting a bond over a letter of credit. Unlike letters of credit, bonds are not reflected as a liability on a dealer's financial statements. If an employer feels confident in their ability to control claims, and yet is financially strong enough to shoulder the claims burden in an occasional bad year, this might be the type of program that could result in large premium savings in most years.
All of the above Workers' Compensation programs are available through Dealers Insurance Services and we would pleased to discuss which plan might work best for your dealership. We have relationships with numerous insurers and would be happy to provide you with our best proposals.