Alternative risk financing for workers compensation A number of alternatives to the standard workers compensation policy and financing method have been appearing in the marketplace over the last few years. The cost of providing workers compensation benefits to employees has become a burden that employers are no longer able to bear without that cost threatening the survival of the very organization itself.
At a time when many medium-to-large companies are operating on razorthin profit margins, the cost for workers compensation benefits cannot always be passed on to the customers. As a result, a number of innovative financing methods have been developed. Four of the most prominent methods include: self-insured pools, captive insurance companies, promissory note arrangements, and integrated employee benefits/workers compensation plans.
While the reasons for developing and using these alternative plans are essentially driven by cost, simply devising a new plan will not solve this problem. The cost of workers compensation benefits is attached not only to higher medical costs and employee wages, but also to the increasing number of accidents, in both severity and frequency, that happen in the workplace.
Methods of loss reduction are a real key to providing innovative financing methods. Each of the alternative financing methods mentioned above should integrate complete loss control and claims-handling strategy in order to contain and reduce the costs.
Legislation has been passed in most states which allows employers to gather together to form self-insured workers compensation programs with a modicum of regulation. Previously, these pools would have been termed insurance companies and become subject to heavy regulation and administrative costs that are typical of the insurance industry but are unnecessary in the smaller pools.
Many mid-size employers would like to be self-insured and are capable of handling it, yet are too small to bear the significant budget swings that occur in self-insurance. It is these employers who benefit the most from self-insured pools.
A pool is formed by a multiple of employers who share common interests, an association membership, or the same industry background. These businesses essentially "pool" their insurance premiums and losses.
The pool itself secures reinsurance, with support services such as loss control and claims handling being provided by an insurance company or a third-party administrator. Legal representation for claims defense could be handled by a law firm chosen by the client or provided by the administrator or insurance company.
Some benefits of such self-insurance include:
* The members purchase reinsurance and administrative services at a volume discount.
* The individual retention in the event of significant losses is less than if individually insured.
* The members are not assessed the residual market charges applied against insurance companies.
Some drawbacks to membership in a pool include:
* The individual employer is jointly and severally liable for the losses of the group.
* The individual's favorable loss experience may be outweighed by the poor loss experience of other members of the group.
* The loss experience of the group may eliminate the cost savings.
Properly structured pools, however, would include careful underwriting of individual risks, both at initial application and upon renewal. It would include securing a solid reinsurance carrier as well as superb loss control and claims management.
Captive insurance companies
Although captive insurance companies have been historically used in areas other than workers compensation, the use of a captive insurance company can be an excellent and less expensive answer to their company problems as well when employers in more than a handful of states wish to pool their premiums. …