Guaranteed-cost workers compensation insurance is most popular among small and midsize companies because it transfers the financial risk of employee injury to the insurer and relieves the employer of most long-tail monetary exposures from workers comp claims.
Under this coverage, your company pays a calculated, set price of insurance for a full year based on a percentage of payroll. It’s a standard formula that allows you to know what your cash at risk is. Your claims and losses over the year will not cause your premium to fluctuate during that policy term. Moreover, with guaranteed-cost workers compensation insurance, administration costs are included, and your long-term risk is absorbed by your insurer. With other types of workers comp policies, such as loss-sensitive coverage (typically more attractive to large companies), the employer needs to reserve money for future employee-injury claims.
With guaranteed-cost workers compensation, you also don’t have to pay a deductible or provide any collateral to your insurer to ensure your ability to share in loss costs. In loss-sensitive policies, you do have to tie up funds to cover potential claims liabilities.
Keep in mind that the advantages of guaranteed-cost workers comp coverage are most beneficial if you keep your claims losses low. That is because a primary component of your cost of insurance, your experience modification factor, is based on a two- or three-year history of claims. If a high-loss year pops up in there, it will affect your premium until it falls out of the calculations.
Though there are many advantages to guaranteed-cost coverage, you should know that your insurer gets to keep any money saved through efficiencies and low claims settlements. You also will typically have limited say-so in which claims get settled out of court and for how much.
