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Explaining Workers’ Compensation Guaranteed Cost Plans

Explaining Workers’ Compensation Guaranteed Cost PlansEmployers who are seeking out workers’ compensation insurance have several options to choose from. Previously we’ve gone over options such as the retrospective rating plans and large-deductible plans that are both great coverage options for larger employers. Another option that works well for businesses both large and small is the guaranteed cost plan.

A guaranteed cost plan is a traditional type of workers’ compensation insurance plan in which the billed premium is determined at the beginning of the policy period and is not subject to adjustment as a result of loss experience. Unlike the alternative plans mentioned above, the guaranteed cost plan requires the full premium paid to the insurer at once, rather than paying out over time as the losses occur.

Breaking Down the Guaranteed Cost Plan

When a workers’ compensation insurance broker is setting up a guaranteed cost workers compensation policy they will find that the underwriter bases the premium on a fixed or adjustable prospective basis or on a specified rating basis. The final cost of the policy for a given year does not depend on the losses from that year. Instead, losses from the previous two to three years combined are used to calculate the experience modification factor (ex-mod), and once exposures are determined for the policy year and a payroll audit is performed, the premium is set. Essentially, the premium rate is guaranteed to not be adjusted based on the loss experience during the policy period.

For employers, a guaranteed cost plan is a reliable and predictable type of insurance policy, because they know that – for at least that policy year – they have a fixed rate for their workers’ comp premiums, regardless of what their actual losses end up being at the end of the policy term. The risk is instead transferred to the insurance carrier, who is responsible for any losses during the policy period that exceed the premium amount. For example, if an employer’s guaranteed cost plan had a fixed premium of $100,000, but their losses for that year amounted to $150,000, the carrier would have to cover the additional $50,000 in losses.

However, because previous years’ losses are used to determine the premium amount for the next year, employers are still incentivized to work to reduce workplace injuries so that their premiums are not raised when it comes time to renew the policy for another year. If employers are able to lower their ex-mod over the course of the policy period, they may even see their premium lowered the following year.

About ASIA Workers’ Compensation

Associated Specialty Insurance Agency, Inc. has been “The Workers’ Compensation Specialist for Brokers and Agents” for the past two decades and is committed to providing brokers and insurance agents across the East Coast with expertise and services to develop a Workers’ Compensation policy. For more information about how we can assist you with claims management, anti-fraud measures, and more call (610) 543-5510 to speak with one of our professionals.

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