Hidden AI Risk: What Every Tech Company Should Know About Liability and CoverageA large deductible plan provides the same workers compensation insurance coverage as a guaranteed insurance plan. Interestingly a deductible option is a guaranteed insurance plan with the addition of a special deductible endorsement.
A deductible program is designed for large employers who have the capacity to self-insure part of their Worker’s Compensation losses. The size of deductibles for these plans is generally in a range from $100,000 to $1,000,000 per occurrence.
Key Takeaways
- A large deductible plan works like a standard guaranteed-cost workers’ comp policy, with a special deductible endorsement added — deductibles typically range from $100,000 to $1,000,000 per occurrence.
- The insurer still pays claims and manages the process as it would under a standard policy; the employer then reimburses the insurer for paid losses up to the aggregate stop loss.
- An aggregate stop loss caps total exposure, protecting the employer from an unusually bad claims year the same way an umbrella policy protects against a single catastrophic claim.
- The core trade-off is cash flow and control in exchange for taking on more risk — the plan pays off when a company’s actual loss experience beats its industry peers.
- Collateral requirements can tie up a meaningful line of credit over several years of coverage, which is one of the most significant practical downsides.
- A large deductible plan gives companies many of the benefits of self-insurance — cash flow advantages, incentive to invest in safety — without the regulatory approval process or start-up costs of becoming fully self-insured.
Why Would I want a Large Deductible Plan?
Reduction in premium! An organization is taking a calculated risk that their loss control and claims management efforts are going to meet or exceed their historical loss experience and outperform similar companies in their industry. The expectation is that the insurance premium saved by choosing a higher deductible will exceed that of the claims costs in a given policy year. With this in mind, a company will develop annual operating budgets that project the direct and allocated costs of its expected claims, including excess insurance.
How does this plan affect your handling of claims?
Not much on the surface! The insurance company makes all payments as it would under a standard workers compensation policy. A claim is filed with the insurance company and an adjuster is assigned to manage the case like a guaranteed cost plan. The insured then reimburses the insurer in paid losses up to the aggregate stop loss limit.
Aggregate Stop Loss
The aggregate stop loss is very similar to an Excess or Umbrella policy for your liability insurance. This coverage ensures that catastrophic claims (specific stop-loss) or numerous claims (aggregate stop-loss), do not upset the financial reserves of a self-funded plan. Aggregate stop-loss protects the employer against higher-than-expected claims. If total claims exceed the aggregate limit, the stop-loss insurance carrier reimburses the employer.
The Purpose of Collateral
In a typical insurance arrangement, the insurer collects an upfront premium and allocates a specified percentage to future claims, operating expenses and profits. In a large deductible program, on the other hand, the insurer requires a much lower premium because the claims costs that fall under the deductible will be reimbursed by the insured. In our experience, collateral requirements are the detail that catches growing companies off guard most often — it’s worth modeling out several years of collateral accumulation, not just the first year’s premium savings, before committing to this structure.
Advantages
- Significant cash flow advantage over most other fully insured or alternative risk programs
- Increased market availability or number of carriers willing to underwrite staffing
- Increased incentive for implementing loss control programs
- Increased incentive for implementing return to work programs
- Advantages of self-insurance without having to obtain regulatory approval or incurring high start-up costs
- Easy access and exit
- Possible tax savings
Disadvantages
- Financial security required
- Numerous years of deductible policies may aggregate collateral to the point that it can deplete line of credit availability
- Unpredictable timing of claim reimbursements
- Risk of large, unpredictable losses, especially if no aggregate deductible applies
Jordan Markuson of Heffernan Insurance Brokers strategizes with clients to form a unique insurance program best fitted to their exposure, risk tolerance and cash flow. Jordan champions a holistic approach to the marketing, loss control, actuarial and claims process that significantly reduces premiums. Part 1 of the series can be found here.
Is a Large Deductible Plan Right for Your Business?
If structured and monitored correctly, a large deductible program can provide a company greater control, reduced long-term total cost, and a significant competitive market advantage over its competitors. Whether a large deductible plan, a self-insured or captive arrangement, or a more traditional program is the better fit depends on your risk tolerance and cash flow — talk to Heffernan’s alternative risk team to find out which makes sense for you. You may also want to explore whether joining a captive insurance program is a better fit for your organization.
