By Jamie Lewis, Assistant Vice President
In a constantly evolving insurance market with carrier appetite and state rating changes, Workers Compensation (WC) rates continue to increase across the board for almost all states. Insureds with less desirable experience modification factors may find themselves looking outside of a traditional agency and carrier relationship to obtain the WC coverage they need with the most competitive premiums available. The idea of subscribing to a Professional Employer Organization (PEO) may become very appealing. If you have a client that is considering this option, it is important to fully understand the type of organization and coverage they may be entering into so that you can advise them of the implications of choosing to go with a PEO instead of maintaining coverage through your office.
The first point to note is that a PEO is not an insurance company. These are firms that are designed to provide services to facilitate almost all of a company’s employee management functions. This often includes payroll processing, hiring new staff, employee benefits, training, tax filings, risk/safety management, and of course Workers Compensation coverage. A client of a PEO would manage the day-to-day functions of their company and employees while the PEO essentially takes over all human resources responsibilities. Workers Compensation coverage is obtained by the client becoming part of a group policy and other clients of the PEO are also under the same master policy. Total payroll, premium, and loss histories are averaged to develop the final premium; one experience modification is used for the entire policy. The PEO is most often the primary named insured and each of their clients are listed as additional named insureds. The client often pays a single fee for this service and their employee management and WC coverage is facilitated through the chosen PEO.
This may seem like a simple one-step process for your insured. As their insurance agent, there are a few challenges with purchasing WC coverage through a PEO that your insured should fully understand. The master policy approach may be a good solution in a year where your insured has a poor experience mod; however, moving away from a PEO to purchase an individual WC insurance policy may be very challenging in the future. A traditional insurance company may not be able to track their loss experience, coverage details, payroll history, or experience mod for the years where coverage was through a PEO. If your insured becomes part of a group master policy, they may lose their individual company WC coverage history. Without specific experience ratings, it may be very difficult for an insurance company to develop a competitive premium for a separate policy.
All agents want to maintain long term partnerships with their clients. This of course means assisting them through difficult terms with increased claim activity. Choosing a PEO may seem to be one of the best choices for your insured to obtain the most competitive WC premium, but this is a decision that should be considered very carefully. As a long term partner with your insured and their company, it is necessary to have discussions about the importance of maintaining their individual experience history and the ability to have carrier and coverage options for future policy terms.