One of the things that make workers’ compensation such a challenge for employers and carriers is the long-tail nature of the claims. “Long tail” means that premiums collected today must cover losses for years to come. Nobody knows this better than the employers in the State of California. Below are few other options for workers compensation outside the standard market option.
– Nelson Aldrich
The workers’ compensation machine in California is an impressive beast. The standard workers’ comp market is the exclusive remedy for all workplace injuries and indemnity claims (lost wages) for over 500,000 employers. The system responded to nearly 800,000 injured workers in 2015.
On average, California is home to the highest workers’ comp rates in the country. This is driven by the greatest frequency of permanent disability claims, higher-than-average cost of handling claims and delivering benefits, and, of course, drastically higher medical treatment costs which are 60 percent higher per claim than the national average.
While indemnity claims in other states are trending downwards, it’s quite the opposite in California.
It’s a bleak picture, but it’s not all doom and gloom in the standard market. Rates have been trending downward for several years as the market continues to soften, and California has an experience rating system which works in favor of those employers who manage to keep claims low.
For some employers, the silver lining is just not bright enough to keep them in the standard market, and many are beginning to ask what else is out there. Perhaps you, too, have grown weary of rate changes as the market swings from hard to soft, then back again. Maybe the ever-changing appetites of workers’ comp carriers has you weary of switching insurance companies every couple years.
If those sentiments resonate with you, then you might be among the growing number of business owners who are looking for an alternative.
Let’s look at three of the most commonly utilized alternatives to the standard market, starting with group captives.
Group captive
A group captive is an insurance company that is owned and controlled by its members. You might be a good fit for a group captive if you have a desire for control and an entrepreneurial spirit, own a financially strong enterprise, have a demonstrated commitment to safety and loss prevention and a better-than-average loss experience for your industry group.
A unique feature of group captives is that general liability and auto liability can be rolled into the same program. This model begins to make sense for those employers who are paying annual premium in excess of $100,000 for workers’ comp, general liability and auto liability combined. The most attractive features of the group captive solution generally fall into two categories: Control and Share of Profit.
What does it mean to have control over your own insurance program? It means that your own loss history dictates the premium you will pay. It also means that as an owner, you have a say in how the insurance company operates, what services will be provided to members and who else gets in the group.
Having a share in underwriting profits is self-explanatory. However, consider this: If there wasn’t money in the California insurance industry, we wouldn’t see folks like Warren Buffett rushing to enter the marketplace. Buffett’s Berkshire Hathaway has grown in recent years to the largest writer of workers’ comp insurance in California, next to the State Fund.
As premium dollars sit in reserve waiting to be paid out, owners of Fortune 500 insurance companies reap the profit from interest earned, and the same is true for members of group captives. While there is a risk-sharing element with all group captives, a close examination shows that risk sharing is contractually capped and a very small component of the overall funding model.
PEO model
Another popular alternative to the standard market is the PEO option. A PEO is a professional employer organization, and it can take many forms. You might like the idea of joining a PEO if you are looking to consolidate your payroll, human resources, workers’ comp, loss control and even group health insurance into one solution.
Generally speaking, PEO’s might be a good fit for owners who want more time to work on their business as opposed to in their business. As an alternative to the standard workers’ comp market, PEO’s often open doors for employers in riskier industries who have been left with State Fund as their only option.
Perhaps it’s a consistently high experience mod, or simply the nature of the work you do that has historically left you with few options. Chances are, with a little digging you will find a PEO solution that both lowers premiums and provides services that will help keep your employees safe.
One thing to keep in mind is that lower premiums are just the tip of the PEO iceberg. To fully realize their utility, business owners should be looking for a PEO partner who will decrease admin burdens, provide valuable consulting, and lower the overall cost of doing business.
Self-insured groups
Self-insured groups are regulated alternatives to the standard marketplace, and they are approved by the State of California to provide workers’ comp benefits to their members. Historically, self-insured groups see an influx of interest when markets are hardening, and rates are increasing in the standard market.
These groups are generally homogenous, meaning similar risks are placed into a single self-insured industry group. As with a group captive, there is a risk-sharing element in that each member is responsible for the performance of the group. However, the extent of that risk sharing is almost night and day when comparing a group captive to a self-insured group. Some self-insured groups have found a way to engineer away risk sharing with reinsurance, but often times the idea of joint and several liability is just too much for some business owners to accept.
You might like the idea of a self-insured group because you are chasing premiums that are more predictable and almost always lower than the standard market. You might also like the idea of a tight group of top-performers comprising the membership, which also lends itself to lower premiums. Self-insured groups are generally known for offering expert consulting for risk profiles specific to their members, in addition to aggressive claims handling.
With the reward of lower, more stable premiums comes the risk that your self-insured group might be hit with an assessment. An assessment simply means that claims were too high, and more money is required to pay the bills. It’s also possible that another member might become insolvent, and those left in the group might be on the hook for his share of the premium.
Even with the higher degree of risk, certain industry groups such as contracting, healthcare, farming, food processing, and livestock management tend to have a strong and growing membership within self-insured groups. As compared to group captives, self-insured groups have lower bars to entry and should be considered as an option for those employers who want alternatives but might not be ready for the captive option financially or with respect to their loss history.
As healthcare costs continue to bloom and wages continue to increase, it’s more likely than ever that the standard market will begin to harden soon. A hardening market means tougher underwriting guidelines, increasing rates, and more restricted appetites. In other words, the standard market menu is likely to feature less options and higher cost just around the corner.
Now might be the perfect time to consult with your risk management professional and join the growing number of business owners who are demanding alternatives. It’s critical to choose a partner who both understands and has access to all available options. Don’t forget to be vocal about your expectations and business goals. While the alternative marketplace might not be a fit now, the right risk management partner can help you prep for entry into an alternative program that better aligns with your long term goals.
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The PEO Compass is a friendly convergence of professionals and friends in the PEO industry sharing insights, ideas and intelligence to make us all better.
All writers specialize in Professional Employer Organization (PEO) business services such as Workers Compensation, Mergers & Acquisitions, Data Management, Employment Practices Liability (EPLI), Cyber Liability Insurance, Health Insurance, Occupational Accident Insurance, Business Insurance, Client Company, Casualty Insurance, Disability Insurance and more.
To contact a PEO expert, please visit Libertate Insurance Services, LLC and RiskMD.
