One important job of managers is examining their business’s risks to determine which risks they can absorb and which they should pay someone else to bear. Insurance premiums represent just one part of your company’s cost of mitigating risk, and a key element of risk evaluation is the selection of deductibles in a property policy. Another is workers’ compensation.
Some companies try to minimize the cash flow impact of workers’ compensation premiums by selecting more aggressive loss retention or self-funding policies, generally with some stop-loss provisions. The insurance company acts as the claims administrator, charging a percentage of incurred claims for administrative costs, and a premium for the stop-loss coverage. This provides an immediate cash flow benefit because there are very few claims processed in the first several months of any new policy.
But beware: these self-funding or large deductible plans are suitable only for companies that have the ability and discipline to reduce the first risk of loss; i.e., they have to avoid accidents and losses in the first place and on their own. Workers comp claims can take a long time to develop and close, and as a manager you want to avoid learning about loss development factors, paid versus incurred claims, collateral pledges and releases and actuarial reserves.
Limiting Workers Comp Claims
Most of the larger workers’ comp carriers have experienced loss prevention departments that love to visit their clients to help avoid accidents. They will encourage you to prepare and adhere to a corporate safety program, and establish a safety committee with regular meetings and some power to enforce safety discipline.
Your safety program will probably include a drug-free workplace policy and an effective back to work/limited duty process. You will get annual MVRs for all employees driving on company business. You will hold periodic safety meetings, provide bonuses for eliminating workers comp claims and enforce safe operations throughout the company. This approach isn’t just good for your wallet but for your employees.
A good insurance advisor will also help you identify and examine other risks to your business. Here in Florida, wind and flood coverage is difficult to acquire or very expensive. Maybe you can live without the property coverage, but maybe you need business interruption insurance or difference in conditions coverage.
A Fruitful Insurance Relationship
Insurance folks talk about relationships all the time. I used to be skeptical, but no longer. Insurers want to deal with insureds on a long-term basis – not with someone who will leave to save pennies. And I encourage you not to leave for pennies. With the right carrier, you will get those pennies back over the long term, if not in paid out claims then in time saved dealing with claims and consistent productivity due to reduced accidents and claims.
As a point of full disclosure, I have changed carriers, brokers, agents and consultants many times, but only after I determined that the incumbent either did not or could not offer the coverage, terms and service I wanted.
Many years ago, I put my company’s insurance program out to bid to two national brokers. The incumbent returned with lower premiums, better coverage and an overall more attractive program with some new carriers. The competitor offered a three-year program that combined workers comp, property and general liability in one policy. This had the potential for significantly lower overall costs if we had no losses.
I told my boss that we had plenty of other risks in our business (patent litigation, limited profitability, approaching down cycle in our industry, etc.) and that if we could find someone to take some of our risk, we should. He agreed, and we continued with the incumbent.
So my advice is to identify what risks you have, what risks you can afford and how much you can spend (time and money) in minimizing your potential losses. Allow that information to guide you when selecting an insurance provider for your business – not just lower premiums.
What are your experiences with business insurance? Do you have questions about the risks you’re facing and how to mitigate them? Ask in the comments below.