Question

You are the Risk Manager for a large regional manufacturing company. You are required by law to provide Workers Compensation coverage to protect your workers. Explain the similarities and differences among the Guaranteed Cost, Self-Insurance, and Large Deductible approaches. Which would you select? Why?

Answer 1

As an Risk Manager for a large regional mfg Co, Various alternate methods to finance workers compensation exposures become more attractive when the traditional insurance market hardens. Workers compensation in particular lends itself to self-insurance due to several aspects inherent in its nature.

• There is a statutory cap on loss wage benefits paid that brings an element of certainty to the severity of losses to be expected.
• The payment of large claims is spread over time providing cash-flow advantages to the self-insuring employer.
• Typically, workers compensation loss patterns are high volume, low severity, which translates to fairly predictable loss forecasting analysis.

Though workers compensation is well suited for self-insurance, a careful analysis must be performed to determine if this type of program is the right fit for the organization. The decision to self-insure cannot be made in isolation by a risk manager or any other individual. It requires careful consideration of following factors which Includes :
1. Management's commitment to the program,
2. The financial condition of the organization,
3. The cost and availability of internal and external support systems, and
4. The particular characteristics of the exposure.
Unless all of these elements are included in the decision-making process and self-insurance is undertaken with knowledge of the risks and resources it entails, the program's chances of success are too Small.

* Similarities and Differences among the Guaranteed Cost, Self-Insurance, and Large Deductible approaches. :-

There are three types of most commonly used insurance programs in the market. The guaranteed cost program, the self-insured group and Large Deductible Approaches. The following are the benefits and pitfalls to both worlds.

1. Guaranteed Cost Program
* The guaranteed cost program or standard market insurance quote is the most commonly used insurance product for workers' comp. The benefits of the guaranteed cost program lyes within the name. A guaranteed cost program means that we have a set amount of premium to pay regardless of current year losses.
i.e. (Rs. 100K in premium with Rs.150K in losses still equates to Rs.100K in premium for the current year).
* Pitfall to this program is that based on the above example the client's future investment goes up as a result of an inflating ex-mod in the future.
* Pitfall to the program is the average deposit is 10% to 25%
* Pitfall to the program is the only ROI is coverage. If look at premium as investment capital as opposed to a line item expense then only return on investment is coverage. If No claims then investment is wasted annually and No tangible ROI.

2. Self-Insured Group
* The Self-Insured Group (i.e. group pooled risk, captive) is more common among larger employers or like industry groupings of companies.
* The benefit to this program is that can leverage cost by pooling risk. In many cases, also have the ability to get money back in some type of dividend program and should have some type of loss control assistance as well.
* Pitfalls to this program are that deposit is normally much more substantial than the guaranteed cost market. The group also has the ability and normally will exercise this right to keep deposit for up to 10 years to guard against future loss costs.
* Pitfall to this program, Only as good as everyone in the group. Unlike the guaranteed cost program if group or company itself performs poorly with losses then have to reanty deposit money to cover the collective losses.
* Pitfall to this program is that these types of insurance pools have a life expectancy. Generally underwriting guidelines loosen to accommodate more group members thus driving up losses and the collective cost.

3. Large Deductible Approaches
A large deductible program can have many benefits for an employer and works like a traditional guaranteed cost plan with a special deductible endorsement. It is designed for large employers that have the capacity to shoulder some risk and be responsible for a portion of their losses.
The size of the deductible for these plans is generally in a range from Rs. 100,000 to Rs.1,000,000 per occurrence. Here, highlight program specifics, advantages and disadvantages, and deductible plan options so that employers can have a true understanding of large deductible plans as a whole.
Program Advantages

• Reduction in the up-front premium improves cash flow and has potential tax savings,
• Goal is to have premium savings which will exceed that of the claim costs in a given year,
• Retains the services of an insurance carrier,
• Rewards insured for maintaining an effective risk control program,
• Catastrophic per accident/occurrence loss limitation is included in the structure of the plan and protects employer from higher-than-expected claim costs.

Program Disadvantages

• Poor loss experience can create an ultimate cost that is greater than a guaranteed cost plan,
• Unpredictable timing of deductible reimbursements as they are made as claim costs are realized,
  and billed,
• Financial security required,
• Numerous years of deductible policies may stack collateral and affect available lines of credit.

  These plans function similarly to a traditional large deductible. However, the method of collateralization is different. In the case of a pre-funded deductible, the insured is required to remit cash in the amount of the estimated loss reimbursements. This fund is used to secure the estimated liabilities and acts as a “working fund” to cover monthly reimbursements. Employers are able to avoid putting up collateral such as a letter of credit using this product.

  A large deductible program can provide a company with cash flow benefits that translates into a competitive advantage over their peers. Communicating the benefits of this program will demonstrate an expertise and secure a long term partnership with client. Despite of all of above plan, The BBSI Program is also availbale in market, in which :
  * The BBSI program has the benefits of both the guaranteed cost program and the Self-Insured program without the pitfalls
  * BBSI's annual cost operates like a guaranteed cost program in the fact that have a set mark-up on an annual basis regardless of losses for that year.
  * BBSI does not have a deposit pitfall providing substantiate 2 1/2 times payroll cycle in a liquid format.
  * BBSI also has the perks of a Self-Insured Group without the coinciding liabilities. With the BBSI program, have the ability to receive up to 1/3 of premium annually in a safety incentive rebate (minus the cost of claims).
  * BBSI is not a collectively pooled risk. This means that is an individually rated based solely on loss ratio with a partner who has a vested interest to keep costs down because making more money.
  * Looking at premium as investment capital instead of a line item expense brings BBSI to the forefront. Receive a tangible ROI from BBSI on premium investment in the form of HR Consulting, Safety & Risk Management, Payroll Processing and Aggressive Claims Management.
  
  When evaluating insurance options for my company and comparing what viable avenues are in today's market, BBSI would seem to me the obvious choice. Keep in mind that still need to qualify for us by demonstrating a vested interest in safe practices and verification of substantial financial liquidity. In a volatile employer market, BBSI is the top choice to combat rising workers' comp costs and increasing volatility in employment regulations.

However making answer to the point for the question i suggest decision-making process and self-insurance is undertaken with knowledge of the risks and resources it entails, the program's chances of success are too much high. But i still belive that BBSi Model is powerfull as compare to other model...

(some of point into answer are on or above question relativity but i feel that its required for knowledge purpose so that i put up during my answer).