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Business owners go about their day doing what they do best — running their business. But once a year they receive a visit from their insurance broker to decide on their Workers Compensation Insurance.
Your broker will likely bring a policy from the "Standard" market, which is considered a "Guaranteed Cost" plan. This means the insurance company has agreed to charge you a specific rate, and regardless of your loss experience during that policy term, you are guaranteed that rate. Any audit premium increases or decreases will be calculated at that rate, hence the name "Guaranteed Cost." If you have no claims, you just made the insurance carrier a nice profit. If you had a bunch of claims, then you likely received a great deal while the insurance company comes out the loser.
What if your company consistently outperforms the standard market? What if your company gets charged that guaranteed rate year after year, but you keep paying that guaranteed cost? To me, it sounds like you are subsidizing the rest of the marketplace. Your company, with a few qualifiers, may be best suited to be in a "Captive Market."
Well, there are several, but the most commonly offered option is a group captive. Generally, you'll be shown a "Homogeneous" captive or a "Heterogeneous" captive. "Homogeneous" means the captive is made up of similar companies that are in the broader industry of your business. “Heterogeneous" means the captive members can be in a wide range of different industries.
Well, there are a few qualifiers to consider as this is not for everyone. First, your business needs to always be outperforming the guaranteed cost product. You also need to have very good loss experience and a very sound safety program. Your safety program needs to be working every minute of every day. Everyone from the owners to the line workers needs to know and understand the safe, correct way to go about their workday. So here are the qualifiers for you to meet in order to be a good candidate for a Captive program.
The guaranteed cost market serves 9 out of 10 businesses quite well every day as most companies out there are paying under $100,000 a year. Some captives will allow for entry at this $100,000 level, but my recommendation is that you would be better served at the $200,000 entry point.
No matter how well you've done with your claims in years past, you have to be able to deal with claims that occur in the future. With captives, each claim will be paid out of your claim fund, so it's important to proactively involve yourself or a company representative in the claim to help expedite the process of healing the employee so that they can return to work as quickly and efficiently as possible.
You don't want to rely on luck when it comes to your safety program. You want an active program that is being utilized every day of every week. Without this key component, you are being very risky and relying on luck.
Once you've met the three "Qualifiers," you need to really look at what your performance has been for the past five years. If you've had a 10% or 20% loss ratio over the course of the last five years, this will likely be a great program for you. Captive Programs have varying ways they distribute premium dollars. Typically, 40% of all premium will be for overhead. This includes captive costs, fronting company costs, loss control, claims, etc. This leaves roughly 60% to pay claims. Some of this money will be in an "A" fund, maybe 70% of the total loss fund and a "B" fund, maybe 30% of the loss fund. If you have a 10% loss ratio, you could potentially receive about 50% of your premium back due to your great performance.
There are other details to consider, but for the purposes of this article, this is the general concept. If you have a poor year, you will be on the hook for a much greater premium than what was paid on the front end. This is the reason you need a bit of risk tolerance. Keep in mind, even the best of companies have a bad year once every five years. If it’s your first year in the program, it can be tough, but don't give up on it.
Should you have any questions about this type of program, I am always available for discussion or appointment.
