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Workers’ compensation is a necessary type of commercial lines insurance that helps protect a business and its employees from costs related to on-the-job injuries. Requirements vary on a state-by-state basis, but most states require employers to obtain workers’ compensation for their business. Business owners who are looking to buy workers’ compensation insurance have several options to choose from. All types of workers’ compensation insurance plans serve the same purpose, but some types are better suited for a specific type of business over others. In this article, we will be breaking down two of the most common types of workers’ compensation insurance.
Guaranteed Cost Workers’ Compensation Insurance
A guaranteed cost plan is considered a traditional type of workers’ compensation insurance. In this type of plan, the billed premium is determined at the beginning of the policy period and is not subject to adjustment as a result of loss experience. The guaranteed cost plan requires the employer to pay the full premium to the insurer at the time of policy’s implementation, rather than paying the insurer over time as losses occur.
How a Guaranteed Cost Plan Works
In a guaranteed cost policy, the underwriter bases the premium on a fixed or adjustable prospective basis or on a specified rating basis. The final cost of the policy for a given year is based on losses from the previous two to three years which are combined and used to calculate the experience modification factor (ex-mod). Once potential exposures are determined for the upcoming policy year and a payroll audit is performed, the premium is set. The premium rate is guaranteed to not be adjusted during that policy period even if losses are higher than expected that year.
Large-Deductible Workers’ Compensation Insurance
A large-deductible workers’ compensation plan provides the same insurance coverage as a tradition guaranteed insurance plan, with the addition of a special deductible endorsement. The insurance company handles all claims for the insured just like they would under a guaranteed cost plan. However, after claim payments are made, the insurance company bills the insured for the amount paid until a deductible is met.
How a Large-Deductible Plan Works
The insurance company will typically need the employer to establish some type of escrow account to ensure they are able to meet the deductible. The size of the deductible can range from $100,000 to $1,000,000 per occurrence, so this type of plan requires significantly more financial security than other plans. If the employer is unable to meet their financial obligation for some reason, it can result in the policy being canceled, and further collection methods by the insurer. However, when structured correctly, a large-deductible plan offers benefits such as improved cash flow, potential tax savings, premium savings that can exceed that of the claim costs in a given year and more.
The key to providing the best workers’ compensation insurance to clients is understanding their needs and partnering with a commercial lines insurance broker that can offer a range of options to choose from to best fit those needs.
About Mavon Insurance
At Mavon Insurance, we pride ourselves on our unique approach to insurance. We focus on integrity, communication, professionalism, respect, and gratitude to help our clients succeed and place business in specialized markets. For more information about our products or to become an agent, please contact us today at (855) 248-1480.