Ways to tame workers' comp premiums - workers' compensation - Insurance: How Well Are You Covered? - Cover Story

HR Magazine, Feb, 1992 by James A. Swanke, Jr.

Workers' compensation is fast becoming the number one risk management issue of the '90s. All employers have been affected in one way or another by the workers' compensation crisis. The percentage increase in workers' compensation premiums has outstripped the consumer price index in each of the last seven years. Employers in such states as Maine, Rhode Island, Massachusetts and Texas have been particularly hard hit with annual premium increases of 20 percent or more.

In addition to skyrocketing costs, employers are finding it more and more difficult to secure workers' compensation insurance in the "voluntary" or commercial market. Many employers have no choice but to secure their workers' compensation insurance in their state's assigned risk pool--for example, 92 percent of all employers in the state of Maine are in this category. In terms of premium volume, 24.1 percent of all employers today purchase their workers' compensation insurance from an assigned risk pool. This compares to roughly 5 percent of all employers in 1984.

From a price and availability standpoint, the United States is in the midst of a workers' compensation crisis. This crisis is likely to grow worse before getting better, as workers' compensation reform in several states is at least 12 to 24 months away in terms of implementation.

Employers across the country are looking at a variety of techniques to better control their mounting workers' compensation costs. These techniques generally fall into the following three categories:

* Alternative risk-financing programs. * Loss control and safety programs. * Incentive plans to motivate employees.

Though this article focuses on alternative risk-financing techniques as a means for employers to reduce their mounting workers' compensation costs, the accompanying sidebar briefly summarizes a variety of loss-control and safety techniques and incentive programs being implemented by employers today.

Self-insurance

Self-insurance is the alternative risk-financing technique that many employers are considering in order to insulate themselves from rising workers' compensation premiums and insurance unavailability. Workers' compensation self-insurance can be broken down into three categories:

Individual self-insurance. The first category is individual self-insurance, whereby a single employer retains its lower level of workers' compensation losses. Under such a program, the employer usually procures workers' compensation excess insurance to protect against more catastrophic losses. Those ancillary services normally provided by an insurance company, such as claims handling, loss control, accounting and actuarial, need to be arranged by the employer (or handled internally).

Most states have stringent rules and regulations for employers who decide to individually self-insure. Many states generally require that employers have at least $500,000 to $750,000 of standard premium before they are allowed to self-insure. The self-insurance application process can be extremely rigorous, sometimes requiring 90 to 120 days to complete.

Large-deductible commercial insurance. A second form of self-insurance that is becoming more and more popular is large-deductible commercial insurance plans. Under such a program, an employer is issued a workers' compensation policy that contains a deductible ranging anywhere from $1,000 up to $400,000 per occurrence. These plans are popular for the following reasons:

* Lower self-insured retentions. * No regulatory approval necessary. * Fewer administrative responsibilities. * Smaller- to medium-sized employers can usually qualify.

The drawback to large-deductible commercial insurance plans is that they are a form of commercial insurance, and as the commercial insurance marketplace continues to erode, these plans are not available in all states.

Group self-insurance. The third form of alternative financing is called group self-insurance. Group self-insurance is becoming very popular for small- to medium-sized employers who neither qualify for individual self-insurance nor are able to secure a large-deductible commercial insurance plan.

A group self-insurance program operates much the same as the individual self-insurance program with one exception: Group self-insurance programs are implemented by multiple employers.

Group insurance popular

Because group self-insurance is becoming increasingly popular as the workers' compensation insurance marketplace continues to deteriorate, the remaining portion of this article will focus on group self-insurance and its advantages and disadvantages.

Exhibit 1 displays a group self-insurance schematic. At the top of the schematic, we have three small organizations coming together to form a self-insurance trust. The self-insurance trust needs to secure those services normally provided by an insurance company, such as claims handling, loss control, claims defense and actuarial services.

In addition, the group self-insurance plan must abide by the state's workers' compensation regulations and file an application with the appropriate state regulators. Most group self-insurance programs are required to secure excess insurance to protect against catastrophic loss. The trust generally pays a premium to an insurance carrier, and in return, the insurance carrier agrees to pay any losses exceeding the group's self-insured retention.