INTERNAL PAGE

Insurance 101

Workers’ Compensation Financing Alternatives

Guaranteed Cost Plan - Premiums charged on a prospective basis without adjustment for loss experience during the policy period. A rate is agreed on at the inception of the policy and is multiplied per $100 of payroll. Only a change in payroll during the policy period will cause the premium to vary. Loss experience during the policy period does not affect the premium for that period.

Retrospective Rating Plan- A retrospective rating plan can be defined as a rating plan in which the final premium is based on the insured’s actual loss experience during the policy term, subject to a minimum and maximum premium, with the final premium determined by a formula which is guaranteed in the insurance contract. If loss experience is better than expected, a portion of the premium paid is refunded. If loss is worse than expected, an additional premium is due.

Captive - A captive is an insurance company that is owned by one or more organizations and that insures only the owners of the company. With regard to Workers’ Compensation the owner or organization could use the captive to reinsure a layer of claims risk. For example:

• Claims up to $250,000 per occurrence - Paid by participant
• Claims from $250,000 to $500,000 - Paid by captive insurance company
• Claims above $500,000 per occurrence - Paid by excess insurance

This arrangement allows the owner or organization to contribute premium to the captive for less frequent large claims, and unused contributions are returned to the participants. Under the group captive concept each employer will have the same proactive focus on claims prevention and management as there is risk sharing at the captive level. Excess insurance for catastrophic claims purchased at a higher retention is less expensive due to the captive layer of protection.

Large Deductible - A large deductible plan is an insurance plan in which the insured is responsible for reimbursing the insurer for claims up to a certain dollar amount and the insurer is responsible for paying claims in excess of the deductible amount. In addition to paying for all losses under the deductible, the insured must pay a deductible premium which covers insurance company expenses and excess insurance.

Self-Insurance - A self-insured Workers' Compensation plan is one in which the employer assumes the financial risk for providing Workers' Compensation benefits to its employees. Each state that allows self-insurance has regulatory financial requirements that an employer must meet in order to self-insure Workers’ Compensation. Even with a self-insured program most employers will purchase excess worker’s compensation insurance to cover claims above a specific retention.

Health Insurance Financing Alternatives

Fully Insured Health Plan - A plan where the employer contracts with an insurance company to assume financial responsibility for the enrollees’ medical claims and for all incurred administrative costs. Small employer groups are normally community rated (pooled) with other small employers resulting in rates that are reflective of the pool and not the individual employer. Adjusted community rating is a rating method under which an insurer charges a particular group an amount that is derived by modifying the community rate for the group's specific demographic factors (e.g., age, gender, family composition, geography). For larger employer groups an insurer may use experience rating when it predicts a group's future medical costs based on its past experience (i.e., the actual cost of providing health care coverage to the group during a given period of time; the group's claim history). Thus, the insurer calculates the group's insurance premium based on its own, not the overall community's, experience.

High Deductible Health Plan - High-deductible health plan (HDHP) is a health insurance plan with lower premiums and higher deductibles than a traditional health plan. With this type of plan the participant typically used a Health Savings Account (HSA) to fund out of pocket expenses. Also known as consumer-directed health care, these plans seek to drive down health care costs by having consumers be more involved in choosing and paying for healthcare services.

Partial Self-Funding - A captive is an insurance company that is owned by one or more organizations and that insures only the owners of the company. With regard to Health Insurance the owner or organization could use the captive to reinsure a layer of claims risk. For example:

• Claims up to $25,000 Individual Stop Loss (ISL) - Paid by participant
• Claims from $25,000 to $175,000 - Paid by captive insurance company
• Claims above $175,000 - Paid by excess insurance

This arrangement allows the owner or organization to contribute premium to the captive for less frequent large claims, and unused contributions are returned to the participants. Under the group captive concept each employer will have the same proactive focus wellness and disease management as there is risk sharing at the captive level. Excess insurance for catastrophic claims purchased at a higher retention is less expensive due to the captive layer of protection.

Self- Funding - A plan offered by employers who directly assume the major cost of health insurance for their employees. Some self-insured plans bear the entire risk. Other self-insured employers insure against large claims by purchasing stop-loss coverage.