Use Caution When Taking on Large Deductible Policies
Large deductible policies can be a great tool for employers with the appropriate resources. But they can also be risky for injured workers and insurers, suggests a new draft report designed to be used as a as a practical guide for regulators, insurance carriers, and employers.
A working group from the National Association of Insurance Commissioners teamed up with members of the International Association of Industrial Accident Boards and Commissions to study the concerns and develop recommendations about large deductible workers’ comp policies.
Large deductible programs “are complex arrangements, and their success depends on the employer’s fulfillment of its obligation to reimburse all claims within the deductible,” according to the “2015 Workers’ Compensation Large Deductible Study.”
“If the employer has misjudged its ability to fulfill that obligation, or is simply very unlucky, the financial consequences to the employer could be catastrophic, and the employer’s inability to pay could have a cascading impact on the financial health of the insurer.”
The paper says that such deductibles in the hands of financially weak employers or those for whom the deductibles are inappropriate based on their size can lead to several unintended consequences, including:
- Impacts to injured employee care and reimbursement.
- Increased costs to the employer.
- Carrier insolvency if the employer cannot meet its financial obligations, which can disrupt coverage for other insureds and their injured workers.
Despite the risks, “there is a trend for employers moving toward the selection of large deductible workers’ compensation programs,” according to the study.
What They Are
The typical policy involves the employer paying a premium to the carrier in exchange for the insurer paying claims in full. While the insurer still pays the claims with a large or mega deductible policy, the employer must reimburse the insurer the amount of the deductible.
“For example, if a roofer falls and incurs $2 million in medical costs, and the employer has a $100,000 large deductible policy, the insurer will pay the claim in full ($2 million) and seek $100,000 from the employer,” the report explains.
The vast majority of workers’ comp policies do not include deductible programs. NCCI figures cited in the report say just 8 percent of policies have large deductibles.
Many companies define “large” deductibles as at least $100,000, and “mega” deductibles as over $750,000 per claim. Policies with a deductible of at least $10 million are rare. According to NCCI, there were 778 such policies in 2013, representing an average of 0.03 percent of total policies written and 0.26 percent of total premium.
Benefits and Challenges
“Employers who effectively utilize these policies experience premium reductions, tax savings, and increased control over costs and workplace safety,” according to the report. “Deductibles encourage employer participation in safety activity that can only happen when the employer has a financial stake.”
Employers have “a financial incentive” to do whatever is necessary to return injured workers as soon as possible. Reducing accidents through safer workplaces are also a benefit, as the employer can then see “significant premium savings.”
However, concerns about insolvencies — among the employers and insurers — are a potential threat. Insurers are advised to have “robust procedures in place” to ensure an escrow account is adequately funded.
“In Chapter 11 reorganization, the employer is still required to reimburse payments that fall within the deductible amount,” the authors explain. “Under Chapter 7 liquidation, the insurer may need to access collateral to continue uninterrupted claims payments.”
Insurer insolvencies may also result.
“In large deductible arrangements, the employer’s obligation to reimburse claims does not make the insurer’s liability for those claims go away until the reimbursement is actually in hand,” the report says. “If the employer’s obligation is unsecured or under secured, then the value of the reimbursement obligation is only as good as the employer’s credit.”
What makes the situation trickier is the fact that claims have long tails, meaning they may be payable over years and even decades into the future. “If the employer fails to pay for any reason, the insurer incurs an unexpected liability, and the failure of the claim reimbursement mechanism has been a significant factor in a number of insurer insolvencies,” according to the report.
Policy Options“The Credit General companies, domiciled in Ohio and liquidated in the early 2000s, had a significant book of this business. The Reliance Insurance Company, liquidated in October 2000, had a large book of large deductible business. More recently insolvent companies with large deductible workers’ compensation business include the Park Avenue/Imperial matter … Freestone … and ULLICO.”
With a carrier’s insolvency, the onus of claims paying falls to the guaranty funds. However, that can present a variety of problems. Another concern mentioned is that of reporting. Where states require the payer to report workers’ comp claims, little is known about whether or to what extent claims in large deductible policies are underreported.
“In order to manage this risk successfully, insurers and regulators must have a clear understanding of the nature and size of the insurer’s exposure, and must ensure that there are adequate measures in place to limit and mitigate the risk of the employer’s failure to pay,” the report states. It suggests a variety of best practices to ensure the process works smoothly.
The insurer should contract directly with the third-party administrator responsible for reporting and claims handling laws, the report suggests. Also recommended is an underwriting pre-review by the underwriting company staffers or hired consultants when large deductible policies are involved.