Taking care of the day-to-day operations is just one aspect of running a business. You have to manage countless other things as well. Of course, your priority is to make sure the logistics are smooth. But in the process, don’t overlook your employees’ protection.
Investing in workers’ compensation insurance should be your top priority. In fact, every state in the U.S., except for Texas, requires businesses to provide workers’ compensation coverage to at least a few of their employees.
Speaking of workers’ compensation insurance, there are various coverage options available. Two of them—guaranteed cost and loss-sensitive—are the most common, however. While both provide coverage, they differ in how premiums are calculated and the level of risk assumed by the business.
Choosing the right type is important since it can impact both financial stability and long-term costs.
Here, we’ll discuss how the two programs are different from each other so that you can pick the right one.
Guaranteed Cost and Loss Sensitive Programs—What are They?
A guaranteed cost workers’ comp program is a fixed fee for insurance coverage that does not change based on loss experience or the amount of loss suffered by a business. This premium is set at the beginning of the policy and doesn’t change, no matter how many claims you file during that time.
According to Prescient National, a variety of factors, including the kind of industry, payroll size, and the employer’s claims history, determine the premium. Note that the premium cannot be modified or adjusted once agreed upon.
Loss-sensitive workers’ comp, on the other hand, is a program in which the final premium payable varies based on the claims that occur during the insured period. That is, the company will have a minimum premium, and then it will receive the final, i.e., capped, payment based on claims made during the time.
According to Insurance Business America, these programs are well-suited for companies with higher risk tolerance. As the upfront costs are lower, loss-sensitive programs offer an added incentive to prioritize safety and compensate businesses with low claims activity.
Guaranteed Cost vs. Loss-Sensitive Programs: 3 Differences
Let’s break down the major differences between the two:
1. The Risk
In guaranteed cost workers’ comp, the insurance carrier largely bears the risk, not the company. If a company has a lot of claims, the insurance provider absorbs the cost because the premium is fixed.
This is why guaranteed cost is ideal for businesses that want minimal involvement in handling claims or are more risk-averse. It’s the ‘set it and forget it’ approach to workers’ comp.
Meanwhile, the company takes on a greater share of the risk with loss-sensitive programs. Basically, it’s a skin-in-the-game approach. If a business can keep claims low, it reaps the reward of lower premiums.
This, however, also means the business has to be more engaged in managing workplace safety and accident prevention since every claim directly impacts costs.
2. Cost Stability vs. Cost Variability
As the name suggests, a guaranteed cost workers’ comp program is predictable.
Companies pay a set premium each year, which doesn’t fluctuate based on claims. This makes budgeting much easier, as there won’t be any unexpected increases or decreases. So, if a company has a particularly rough year with several claims, it’s still protected from cost fluctuations since the premium is set.
But loss-sensitive workers’ comp is all about variability. Premiums in these programs are directly influenced by the company’s actual losses or claims history.
This is an attractive option for businesses that prioritize the potential to save on premiums by minimizing claims. However, a bad year with several claims could spike premium costs, which can make budgeting a bit trickier.
3. Flexibility in Premium Adjustments
Guaranteed cost programs are rigid. Insurers calculate premiums based on the payroll and classification rate at the beginning of the policy period. That remains the same throughout, regardless of claims.
This lack of flexibility is a plus for many businesses, as it offers clear, predictable costs without the need to make mid-year adjustments. But for businesses with strong safety programs and low claims, it is not as they miss out on potential savings.
Flexibility, however, is a distinctive feature of loss-sensitive programs. Since premiums are based on actual claims, there’s an opportunity for cost adjustments based on how a company performs over the policy term.
A company with fewer claims than expected could see a lower premium at renewal, while higher-than-anticipated claims could increase premiums.
In the end, deciding between guaranteed cost and loss-sensitive workers’ comp depends on each business’ unique situation.
If stability, minimal risk, and simplicity are top priorities, guaranteed cost workers’ comp may be the way to go. But if your business has the resources and commitment to invest in reducing claims and managing risks, a loss-sensitive program would be ideal.
Ultimately, the choice comes down to understanding your company’s risk tolerance, budget flexibility, and safety culture. Working with an insurance advisor can also help you analyze your company’s risk profile and make an informed decision.
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