Most medium-sized business owners today are looking for creative ways to cut costs and lower overhead. “Cost cutting”, when done rationally and selectively, can produce higher profit margins and added stability within a mid-sized company. However, it’s usually the fixed expenses (the ones that make up the bulk of a business’ income statement) that are most difficult to chip away. Workers’ Compensation is one of these fixed expenses – a mandatory coverage in most states and, depending on the nature of business, potentially a significant overhead expense. So, how can a medium-sized business buy less Workers’ Compensation insurance?
Typically, the employer is paying their premium and “transferring” some or all risk to the carrier. Large employers have the advantage of self-insuring some portion of their WC, meaning they can pay claims themselves rather than relying on the traditional risk transfer. However, a mid-sized employer faces a challenge when choosing between self-insurance and risk transfer. If they self-insure, there is potential for volatility and unpredictable outcomes via catastrophic losses. If they transfer all risk, are they paying the actual cost of THEIR expected WC claims or just the industry average?
The industry average isn’t equitable for all medium-sized employers because it’s just that – an average. Employers who are a better than average WC risk subsidize the below average, poorer performers. The employer who implements a proactive safety program, invests in his/her employees and successfully drives down frequency/severity of WC claims (Employer A) shouldn’t necessarily pay the same premium as the apathetic employer (Employer B). Yet far too often this is the case – Employer A is being held to the “average” for their industry when they could be paying for THEIR claims (the ones that are predictable to them based on characteristics discussed above). So the question above is posed in a different way – how can the above average, mid-sized employer pay for THEIR predictable claims without being subjected to the volatility of an unpredictable claim?
One solution to the issues above is for the mid-sized employer to enter a group captive. Group captives pool like-minded employers together, and provide them the opportunity to buy less insurance using the RST acronym (retain, share, transfer). Employers retain losses that are predictable for them, share losses that are not predictable for one individual, but predictable for the group, and transfer losses that are unpredictable for the group as a whole (catastrophic losses that go to the insurance carrier). The group is essentially playing the role of the insurance carrier – they get to keep any underwriting profit while earning investment income on premium not being used to pay claims.
The group captive approach answers our two questions above – how can we buy less insurance AND reduce volatility? It also benefits a mid-sized employer by allowing them to share ideas and resources with other employers in the group, allowing them access to high-quality service providers (safety consultants, claims adjusters, etc.), and allowing them to control their insurance destiny.
So why hasn’t every mid-sized employer joined a group captive already? Just like other WC insurance avenues, group captives aren’t a fit for everyone. If the following is true for the employer, a captive option could be the right avenue:
- Superior loss history
- Strong financially
- Premiums that don’t correspond to losses
- Superior safety program
- Entrepreneurial attitude
If a mid-sized employer has the opportunity to cut costs, lower risk, buy less insurance and have more control of their Workers’ Compensation program, why not get started today?