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Employers can analyze, compare and evaluate different financing methods to achieve the best balance of costs and risks.
Keywords: workers' compensation; guaranteed cost plans; large deductible plans; risk financing; scenario analysis; simulation
DOI: 10.1177/0886368706295345
Workers' compensation is a "nofault" system that provides compensation to individuals for work-related injuries and occupational diseases. The compensation generally covers the medical expenses for an injured employee, disability benefits to replace the worker's loss of income or earning capacity, rehabilitation of the injured worker and death benefits. Most employees are covered by state laws, although federal employees, maritime workers and railroad workers are covered under alternate jurisdictions, and self-employed persons are not required to purchase insurance.
The workers' compensation system relieves employers of liability from common-law suits, and if a worker is covered by workers' compensation, jurisdiction-specified workers' compensation benefits are the only damages available to the worker. Depending on jurisdiction, employers may be self-insured or purchase insurance to cover workers' compensation claims.
Guaranteed workers' compensation insurance plans transfer financial risk from the employer to the insurance company in exchange for periodic insurance payments. The rising cost of guaranteed workers' compensation insurance has caused many employers to seek alternate financing structures.
Self-insurance allows an employer to retain all financial risks and benefits, whereas group selfinsurance allows groups of employers to retain all financial risks and benefits from their combined insurable pool. Another alternative available to employers who would like to reduce the risk of catastrophic loss but would also like to reduce their insurance premiums through quasi-self-insurance is the large deductible insurance contract.
Large deductible plans may reduce insurance costs for employers who are willing to retain most of the claims risk without depriving employees of the certainty of insured benefits. Empirical evidence on the benefits of large deductible workers' compensation insurance contracts was provided by Shields, Lu, and Oswalt, who found that the selection of a workers' compensation policy with a large deductible had an immediate impact on reducing the cost of high-dollar indemnity claims and a delayed effect on reducing workers' compensation claim rates.1
Baranoff examined the determinants that influenced Texas school districts' decisions to fully insure, self-insure or select a large deductible workers' compensation plan. The results indicated that higher insurance costs led to a...