Show Me The Money – Turning Workers’ Comp Risk into Profits

You Really Read It

It’s been a busy few months and in that time, I’ve been able to make many an acquaintance, whether at conferences or just folks connecting online.  In those conversations, I was amazed that more than a few people were reading my posts, and encouraged me to write more!  Who am I to keep my adoring fan(s) waiting…

I’ve noticed a common theme in recent conversations, which I would summarize as follows:

• Can workers’ compensation be a profit center? If so, how?
• How should a start-up or a PEO on a guaranteed cost plan prepare to transition to a large deductible plan?

Those questions have triggered a bunch of thoughts to share.

Show Me The Money

The path to profits is similar for both a guaranteed cost (GC) PEO and a large deductible (LD) PEO. The main difference is that the GC PEO still has time to prepare and iron out big wrinkles (there will always be little wrinkles) whereas the PEO already retaining risk has to get things in order much sooner. While I have already touched upon how the various risk areas would ideally function in previous blog posts, allow me to present a more holistic, top-down view here.

• Leadership will benefit by viewing their PEO as a small insurance carrier, providing a package of insurance coverages including WC, health benefits, EPLI, et al. The PEO is not just providing monoline coverage, but those various coverages simultaneously. And as with WC and health benefits, the most ideal WSE for one may be the least ideal for the other.
• Accordingly, WC and health benefits should coordinate with each other in underwriting and pricing precisely because each coverage views risk differently. Quantifying the potential profit in each and then making a joint decision on acceptance and pricing is paramount to sustained profitability.
• Further, looking at the PEO proposition in total, with insurance as a major component, will help the overall pricing decision. Perhaps insurance is expected to lose money but admin is more than sufficient to make the client profitable for the PEO. Quantifying that potential profit or loss from the insurance piece can enhance both sales and profits.
• Within WC, underwriting, safety consulting, claims, finance, and actuarial all need to work in concert. Leadership overseeing the WC book will benefit by appreciating the interplay between each department, and how to adjust if issues arise.

I would consider all of the above to be best practices regardless of the PEO’s risk retention strategy. The better the organization (as described above), the better the chance that the PEO’s insured losses will be lower, allowing for increased profits through risk retention or through lower guaranteed costs going forward.

Two Last Parting Thoughts

First, retaining risk is a multi-faceted decision. When is the right time to retain risk? How much risk should a PEO retain (e.g. do you jump straight to $1M or start at something lower)? Are there additional best practices to layer atop the above points when retaining risk? All good questions… to be answered in a future blog post.

Second, call me biased or just a prognosticator – PEOs need to, and eventually will, utilize actuaries more for their subject matter expertise and ability to affect improvements in multiple areas of the risk organization than just analyzing retained reserve liabilities. Take a look at the structure of insurance companies. There are entire departments of actuaries working at reserving, pricing, predictive modeling, etc. Few PEOs have actuaries in-house but more should consider the benefits of having actuarial support.

Wrap Up

Turning your WC program into a profit center is not an overnight transition, but it need not be an impossible dream either. Investing in the right people and processes now can make for a profitable future.

Take-Away Questions

1. Does your PEO view WC and Health Benefits risk as complimentary, conflicting, or independent?
2. What does your PEO want to change before retaining risk?
3. Do you believe an insurance carrier’s personnel structure is something for PEOs to emulate?