3. Deductible Programs

Deductible plans are a form of self-insurance. 

In this type of plan, the carrier issues a policy for workers’ compensation coverage, complying with legal and business requirements.  The insured is responsible to pay for the first portion of any occurrence, The Deductible amount, with the carrier providing excess coverage for amounts due over the deductible amount of any one loss and for all loss above a certain aggregate.  For example, the carrier could provide coverage for any one loss above $250,000 and for all losses above $1,000,000 in total.  The insured funds an account (loss fund) to pay losses and the insured reimburses the fund as losses are paid.  The insured must collateralize, usually by letter of credit, an amount approximately equal to the difference between the loss fund and the maximum.  This changes on a case-by-case basis.

§ In addition, the insured has to pay for all claims expenses. Often times the claims are handled by a third party administrator (TPA) that the insured can choose, based on price and service subject to the approval of the carrier. 

§ All loss control/loss prevention services become the responsibility of the insured and must be paid whether performed by the carrier or an outside party. Costs for claims and loss control may be included in the premium if performed by the carrier, but they are not free.

A very important change occurs beginning with these plans that has an impact on insured costs.  The cost is now associated with paid losses instead of incurred losses. Costs are based on paid amounts. The cost is spread out over a longer period of time.  The insured is responsible for the costs up to the per claim deductible on each claim, and the costs for all losses up to the aggregate.

Obvious downsides occur with this plan: 

§ Claims take a long time to close, in total, so it is a long-term procedure.  Eventually, if the insured stays on such a plan, the cash flow advantages of paid vs. incurred disappears as payments are being made on claims over multiple years.

§ Poor loss experience can create ultimate costs far greater than a Guaranteed Cost program. 

§ Letters of credit reduce credit lines, and will multiply as the insured renews on deductible plans. 

§ Insured cannot predict how the losses will impact their day to day cash flow.

These plans, as with any loss sensitive plan, are not advised for accounts with loss experience that is inconsistent or unpredictable.