What is a guaranteed cost program? Is that the type of policy I have in place now? 

James Moore

A great question on a basic subject was emailed in by one of our new newsletter subscribers.

A guaranteed cost program means that you will pay a flat fee of sorts for a given policy period. The policy is not adjusted for losses as in a loss-sensitive program. Most small and medium-sized businesses will usually find a guaranteed cost program as the most desirable insurance policy to cover their workers' compensation losses. 

The basic guaranteed cost program premium is calculated from a rate multiplied per $100 of the employer’s payroll. The final workers' compensation bill for the policy period occurs after the premium audit for that policy year. 

Once the policy is issued with the rates per $100 of payroll, the rates usually cannot change during the policy as with a loss-sensitive program. Loss-sensitive program variables can be adjusted during a policy year depending on the amount of losses incurred.   

Guaranteed cost programs transfer the risk of the insured and administrative costs directly to the carrier once the policy is issued. The total transfer of risk guarantees the cost at a certain level.     

As businesses grow, the need to retain part of their losses for a lower premium can lead an employer to use deductible programs such as a large deductible. The large-deductible policy level will usually be $250,000 per claim.   

The large-deductible policies require the employer, not the insurance carrier, to “guarantee” more of the cost.

The employer should not just accept one guaranteed cost program as the cheapest policy. Comparing at least three quotes per year may generate surprising results.  

As your company is small but growing, a guaranteed cost program will likely be the best method to control your workers' compensation costs. Your company cannot likely bear the brunt of financing a large claim other than guaranteed cost.   

This blog post is provided by James Moore, AIC, MBA, ChFC, ARM, and is republished with permission from J&L Risk Management Consultants. Visit the full website at www.cutcompcosts.com.