Level of Reinsurance Mystery Self-Insured Critical Number

One of the least asked questions by self-insureds on their Workers Comp program – what is the most advantageous level of reinsurance for our program’s success?  Even though reinsurance is the “disaster or multiple disasters” insurance program, I usually have to bring up the subject with self-insured clients.

I am sure we all have heard the term long-tail COVID.  For more info, check out this academic article on long-tail COVID.

This article was generated after watching this video by AM Best on reinsurers.

If you have not subscribed to any of AM Best’s publications including AM Best TV, you are seriously missing out on great free information.

Level of Reinsurance – The Mystery Number Not Considered

NCCI and other rate bureaus define a large deductible plan as any that has a deductible of $100,000 or more.  I think the rating bureaus may add to that number soon if they have not already done so by the end of 2022 due to inflation.

I am not referring to a large deductible program as self-insurance.  The two terms are sometimes intermixed.   I am using the $100,000 as a baseline for the level of reinsurance in self-insurance.

If you have claims loss runs from the last 10 years your company is far ahead in finding the right level of reinsurance.  Why do I say this?  Loss Development Factors (LDFs) usually examine a 10-year timespan.   The likelihood of a workers comp claim extending beyond 10 years is somewhat remote.

Any time that you can look into the past 10 years and use that data  to forecast 10 years into the future, a 20-year business cycle is covered.

Mystery Number – Really?

The level of reinsurance to which I am referring is not the level where reinsurance kicks in per claim.  Not having the proper aggregate level becomes more important when no one claim reaches the level of reinsurance.  The aggregate level covers self-insureds when all claims total a certain number.    Let us look at a quick and dirty example –

A self-insured has a bad claims year:

• 28 lost time claims
• Average lost time claims value = $122,250.00
• None reach the level of reinsurance of $250,000, so the level of reinsurance  (per claim) is not reached
• 28 claims * 122,500 = $3.423 million (Ouch!) – out of pocket payments

Mystery Level of Reinsurance Is the Total Level = Aggregate

Rarely ever does a self-insured “bust their aggregate”.   In the above example –

• 3.423 million in claims payments
• The aggregate level of reinsurance = $2 million
• Self-insured is responsible out-of-pocket for $1.423 million
• Aggregate can be a company saver – remember to subtract the cost of the aggregate at this level to find the true number of the aggregate savings.

Why did I write this article?  I have the above example of a self-insured (numbers embellished) in front of me now – except to save reinsurance premiums, they set the aggregate level at $3 million.  Many of the above 28 claims were long-tail work-related COVID claims.

Related Articles –

Definition of Aggregate 

Aggregate Alternate Definition

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.

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