Workers' compensation is a system that provides cash benefits to employees who are injured or become disabled due to an on-the-job injury or illness. In the workers' compensation system, employees give up their right to sue an employer for injuries from work-related accidents in exchange for receiving benefits for all work related accidents or injuries, regardless of fault.

All states have workers' compensation laws, and while the procedures and benefits of applying payments may vary, workers' compensation is considered to be part of the expense of doing business.  Managing this expense continues to be one of the most challenging issues facing businesses today.

There are two primary types of Workers’ Comp insurance: 

1. Primary Workers' Compensation Insurance
2. Retention Programs, Including Self-Insurance

Primary Workers' Compensation Insurance
This type of insurance is based on a set premium amount.  The amount is based on an employer's exposure to risk due to the amount of payroll by class code and their experience factor or Mod. While additional factors may play a part in the underwriting process these are the primary factors in determining the amount of premium an employer will pay.

The advantage to this type of coverage is that regardless of number of losses the insured may have during the policy period, the business will only pay the prescribed amount of premium (unless there is an increase in reported payroll during that same period).

However if the insured's losses are considerable, or if the carrier determines their class codes undesirable, they could be faced with non-renewal or a considerable increase in premium.   

Self-Insurance
Managing workers' compensation exposure continues to be one of the most challenging issues facing businesses today. Many organizations turn to self-insurance as a means of exercising greater control over their programs and associated workers' compensation expenses.

Self-insurance is a carefully designed risk management mechanism in which companies elect to pay for their own losses up to a predetermined level. Most companies purchase excess insurance to cover losses that exceed this amount. Typically, the level of losses a company assumes is based on the amount the company could afford to pay without affecting its financial stability. Because of the predictable nature of losses, workers' compensation readily lends itself to self-insurance.

In most states, companies must undergo an extensive qualifying process to become self-insured. If the company can demonstrate the financial wherewithal to pay future losses, meet the state’s qualification requirements, and display an adequate service plan, self-insured status is typically granted. Because of the increased administrative responsibilities associated with establishing and maintaining a self-insurance program, companies typically apply for self-insurance in those states where they have significant payroll exposure.

Self-insurance requires the company's management team to take on a more active roll than most insurance plans. In addition to meeting state qualification requirements, companies that elect to self-insure their losses must provide the services necessary to support the plan and control expenses. This includes loss control, claims management, and program administration. There are still a number of potential advantages associated with self-insurance plans:

• Maximum program control
• Immediate savings from favorable loss experience
• Cash flow benefits
• Investment income opportunities
• Elimination of certain insurance expenses
• Customized services program
• Strong incentive to control losses
• Long-term strategy

Disadvantages include:

• Significant cost associated with adverse losses
• Budgeting difficulties due to loss fluctuations
• Increased administration
• No Certificate of Insurance
• Dependence on excess insurance and bond market
• Potential increase in commercial coverage cost
• Financial information may become public
• Long-term commitment

For information on how 5Star Workers' Compensation Services can help you and your clients select the right program for their needs contact 5Star Workers' Compensation Services, 1·800·965·7457 or email workcomp@5starsp.com.