The Workers' Compensation Conundrum

By: Larry Holstein
Date: 9/1/2007

A temporary staffing firm's Workers Compensation insurance premium is its second highest business expense after payroll. Do you, the temporary staffing company owner, regularly face escalating policy premiums despite having an excellent loss history? Do you have trouble finding the cash for the policy premium down payment as well as for the balance of the premium payments thereafter? If you answered yes to either of these questions, then you are only one of a growing group of temporary staffing agencies that face the day-to-day pressure of the traditional market for workers compensation insurance.

Temporary staffing agencies, particularly small to midsize companies, are facing a growing dilemma in both acquiring and paying for workers compensation coverage. As the temporary staffing market has grown significantly in the past ten years, so too has the cost of doing business, due in no small part to the substantial increase in the cost of obtaining workers compensation insurance coverage. Today, staffing agencies face escalating premiums that typically bear little resemblance to actual loss history. Further, there is a growing trend toward fewer and fewer traditional insurance carriers being interested in underwriting the market for small to midsize staffing companies. And, even in the situation where a staffing agency can obtain coverage, all too often, the requirement that typically 15% to 25% of the annual premium be paid at policy inception creates a tremendous cash flow problem that prevents the agency from being in a position to pay for the policy. All of these factors combine to leave many temporary staffing agencies in the position of having to decide whether or not they can afford to stay in business.

A reasonable alternative does exist, however, for what I like to refer to as the "Workers Compensation Conundrum." Captive insurance-type programs have existed in various segments of the insurance market for at least the past fifteen to twenty years. These types of programs have found their way into the staffing industry workers compensation marketplace as well. A captive, unlike the traditional third-party insurance carrier who sells an indemnity policy on an individual basis, is a group of participants that, much like a cooperative, partially self-insure their risk. The goal of a captive is to provide a loss sensitive insurance plan in order to stabilize the cost of insurance to its participants. In the case of the typical temporary staffing industry captive, each participant of the group is underwritten and pays premiums based on a combination of each individual company's own historical (actual) loss experience and an underwriting process that is specifically geared for the temporary staffing industry.With the traditional insurance product provided to a staffing agency by a commercial carrier, an underwriting process that considers staffing industry- wide risk factors incorporating general actuarial information that is more broad-based for the agencies within the staffing industry generally determines the agency's premium. Whereas, the underwriters in a staffing industry captive insurance program typically place more weight on actual loss history and risk control and management of the specific agency to be insured. This focus usually results in lower premiums from year-to-year for the staffing agency captive participant who maintains a good loss history and has good management practices and procedures in place.

In the typical staffing industry workers compensation captive, each participant is required to undergo a training program to facilitate best practices in risk control and management, since most captives require their participants to maintain a certain minimum risk management procedure score to maintain eligibility as a captive participant. The training program usually covers a myriad of topics designed to educate each program participant in skills and management techniques that lead to the ultimate goal of minimizing workers compensation losses. This has a two-fold effect. First, it promotes lower, stabilized, premiums over the long run and, second, it results in the majority of the captive's participants maintaining better loss experiences, thereby reducing each individual participant's risk of having to contribute to excess losses within the group.

There is an element of risk sharing, however, among the captive's participants, as in any cooperative venture. Typically, each participant is potentially responsible for its pro-rata share of another participant's excess losses in any given year. However, the statistical likelihood of a catastrophic loss by one or more participant in any given year is minimal. And this risk should be substantially offset over time by the lower, stabilized, annual premiums, assuming the company has proper risk and management controls in place, thereby mitigating its actual loss experience.

If you would like further information on this topic, please go to www.tempay.com and click on Workers Compensation.

Larry Holstein is the founder and President of TemPay, Inc., a national, privately held, financial services and management company exclusively serving the temporary staffing industry. He can be contacted at 216.283.6666, or by email at lholstein@tempay.com.