Rancho Mesa's Alyssa Burley and President Dave Garcia, talk about performance based workers’ compensation programs.

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Performance Based Template - Excel File

Director/Producer/Host: Alyssa Burley

Guest: Dave Garcia

Editor: Alyssa Burley

Music: "Home" by JHS Pedals, “News Room News” by Spence

© Copyright 2021. Rancho Mesa Insurance Services, Inc. All rights reserved.

Transcript

[Introduction Music]

Alyssa Burley: Hi, this is Alyssa Burley with Rancho Mesa's Media Communications and Client Services Department. Thank you for listening to today's top Rancho Mesa news brought to you by our safety and risk management network, StudioOne™.

Welcome back, everyone. My guest today is Dave Garcia, President of Rancho Mesa. We're going to talk about performance-based workers’ compensation programs. Dave, welcome to the show.

Dave Garcia: Hi, Alyssa, thanks for having me. I love being here in StudioOne™ with you today.

AB: In the past, we've explored performance-based workers’ compensation programs, like captives and deductibles, and how these plans can create a competitive advantage while providing an opportunity to monetize a company's insurance program. What other options are there for performance-based workers’ compensation?

DG: Well, that's a great question Alyssa. You know, there's several different plans. The one we'd like to talk about today are called retrospective rating plans, or "retros" for short, and in many cases, those possibly could be the right next step for many businesses to explore.

AB: In simple terms for the audience, describe what a retro is and how it works.

DG: Okay so, a retro, to kind of keep it in basic terms is, we're all familiar with guaranteed cost, so that would be your normal guaranteed cost premium. A retro premium would be slightly higher than guaranteed cost, so that would set the bar. From there, they'll be a maximum, so there would be a potential penalty, and that would range from 1.05 to 1.15 of that premium, down to a minimum, which is many times about 40% less than that premium side. So, if you think about it, you kind of have a minimum premium, like if you had zero losses, and you'd have a maximum premium in case you had the kind of year and losses that you've never had before. So, most companies then would look at that and say, okay, am I able to control my losses in order to maybe get a return of premium.

AB: Okay, now that we know what a retro is and how it works, what would the profile of a company look like that might want to make a retro an option to explore?

DG: Sure, any of the performance-based plans, these programs are really designed for companies that want to bet on themselves, that they ultimately want to lower their overall cost of insurance. The characteristics of a company like that, very strong management commitment to safety and in turn, their claims experience over several years would reflect that.

AB: What do you mean by their claims experience reflects it?

DG: So, I think when we look at it that way, any performance-based plan, what we're looking for is what we call like a loss stratification, or taking a historical look back about five years and seeing how their claim amounts compared to their premium amounts.

So, if you're able to run about a 40% or less loss ratio and loss ratio, it simply claims to premium, then in most cases, on a retrospective plan, you would get a return premium. So, if you're a company that feels like hey, historically, I can control my losses, my loss ratio has been below 40% almost every year, if not every year, you should definitely consider one of these performance-based programs. Today we happen to be talking about a retro.

AB: So, is there a rough premium size that begins to make sense, to have a retro plan?

DG: I'd say in over my 30 years that you're probably looking at premiums of $500,000, we're talking about in guaranteed cost premiums now, and up where it begins to make sense. That's not to say that if you had premiums of 300 or 400,000, it still might make some sense to do that. But typically, at $500,000 or more, these programs, all performance-based programs, kind of moved to the front of the line.

AB: So, are there particular elements of these plans that if someone's interested in this type of plan, that they should review closely?

DG: Absolutely. And they should really rely on their trusted insurance adviser for this. But these programs contain a lot of different elements and variables that really need to be analyzed, explained, and then understood before accepting any of these types of programs.

So, examples of those things would be you'd want to know what's my maximum and what's the worst case scenario? What's my minimum premium? What's my best case scenario? Will there be any letter of credit required or not? What's the lost cost factor, or LCF?

So, typically in these programs, what happens is they're going to take your claims and multiply them by some additional percentage. So, for simple purposes, if you have a $10,000 claim and you have a loss conversion factor of 1.1, that $10,000 claim, for the purposes of the calculation, would go at $11,000.

So, you want to be aware of what is your LCF. All of these programs would have one. You want to find out when you're doing your retro calculations, are they based on incurred losses, which means it's an open claim and we're going to use the total reserved amounts, or on a paid basis, what's actually been paid. Most plans will run on the incurred portion, but you do definitely need to know the answer to that. You want to look at your table to see what is my potential for returns. So, typically when you're looking at a retro table, loss ratios between 0%, so, if you had no claims, and up to about 40%, you should expect a retro return. Anything above that you probably would not. And if you get way above that, you may actually go into the maximum side and owe some additional premium, so, you have to understand the risks there as well. They're also, going to calculate these losses multiple times. So, it's not just a onetime calculation of losses to premium and then a return or not a return. It's typically going to be going on for anywhere from three to four to five years. So, you want to understand that, understand the implications of that. When they pay out the first retro return. It won't be 100% of that return. They're going to hold some back and capture it in the second, third and fourth return.

So, again, this is why you really need somebody that's familiar with this to advise you and walk you through all these different steps because there is the potential for a recapture of premium should your claims go higher. You may have to return some of it.

So, it's fairly simple, but you need to really understand it. And then lastly, as you get further down into the calculations, you can actually go to the carrier and ask to buy out any of the remaining open claims. Sometimes that's a really strong strategy on your part. So, again, really rely on your trusted advisor for this. They should be really familiar with it. You want somebody who's gone to this rodeo before you don't want to have it be their first time.

AB: We'll include a link to an example of a retro workers’ comp program in the episode notes. And Dave, if listeners are interested in a performance-based workers’ compensation program, what's the best way to get in touch with someone at Rancho Mesa?

DG: Well, there's a couple of different ways. If you get to our website, you can either complete the section that says, "Are you a candidate for a performance-based program?" You click on that and then we'll respond back to you. Or you can also, complete our performance-based insurance spreadsheet, which is also, located as a link to the article on our website. In either case, you can always default and simply call us at Rancho Mesa, we'd be happy to sit down and walk you through it.

AB: Perfect. Dave, thank you for joining me in StudioOne™.

DG: Thanks, Alyssa. Have an awesome day out there everybody. Bye.

[Closing Music]

AB: This is Alyssa Burley with Rancho Mesa. Thanks for tuning in to our latest episode produced by StudioOne™. For more information, visit us at ranchomesa.com and subscribe to our weekly newsletter.