If you’re running a mid-sized or large organization, you know that workers’ compensation insurance is a big line item in your budget. It’s also that part that can seriously eat into your profits if you’re not careful. One serious incident, maybe a severe burn or a catastrophic spinal injury, can spiral into millions of dollars in medical and indemnity payments over a lifetime.
For context, the U.S. Bureau of Statistics reports that there were 2.6 million cases of injury and illnesses reported to employers in 2023. That translates into huge payouts by the affected companies in workers’ comp.
While primary insurance will handle some of these costs, the rest will have to come out of the employer’s pocket. Too many of these types of out-of-pocket expenses can cripple your company’s finances.
This is where excess insurance comes in handy. It’s designed to protect your business from a single catastrophic event and, if you use it wisely, can become a really powerful cost containment strategy for your business.
What is Excess Insurance?
At your organization, you probably handle your workers’ comp claims through a formal self-insured program or something similar. Under this type of arrangement, your business pays all workers’ comp claims as they occur, but up to a certain dollar amount. That’s your insurance excess or retention limit.
Excess insurance is what steps in when you hit your retention limit.
For example, if you agree to pay the first $500,000 of every claim and an employee’s treatment for workplace injury hits $1.2 million, your excess workers’ compensation insurance kicks in to cover the $700,000 difference.
Without this excess insurance cover, that extra cost will come straight out of your company’s purse. Too many of these types of expenses too often can cripple your finances.
According to Prescient National, excess insurance is there to protect against an unexpected catastrophic loss, as well as an unexpected frequency of losses.
Why Cost Containment Matters
Workers’ comp claims aren’t just numbers on your spreadsheet. Rather, they’re expenses that can seriously impact your bottom line.
Let’s break it down. According to Injury Facts, workers’ compensation claims averaged $47,316 between 2022 and 2023. That’s probably for regular operations. If your business is in a high-risk industry, such as construction or transportation, you can expect this figure to be much higher.
And it doesn’t stop there. Some businesses have even seen their premiums jump after just one bad year. In fact, all over the US, workers’ comp premiums increased by 1% in 2023. That’s money that could have gone into the business, maybe to get more equipment, hire new employees, or just to keep the lights on for longer.
While you can’t do anything about these increases, you need to look for how to make savings on your coverage while still keeping your team protected.
Key Cost Containment Strategies with Excess Insurance
So, how can excess insurance be a powerful cost containment, and what are the strategies you can apply to make the most of it?
1. Choose the Right Attachment Point
It starts with choosing the right attachment point. This is the dollar amount you agree to pay per claim before your excess insurance kicks in. In the example we used earlier, $500,000 is your attachment point.
Choosing an attachment point is just like choosing a deductible, but a bit more strategic. Pick a too-low amount and you might be paying for coverage you’ll never use. Set it too high, and you might be biting more than you can chew.
So, how do you arrive at the sweet spot? Simple. Look at your workers’ comp claims data (we’ll talk about that later). You should also consider your risk tolerance, your worst-case scenario, and your financial capacity as a company. Better still, work with a broker to find a balance that makes sense to you.
2. Layer Your Coverage to Save Costs
Here’s a surprising fact not many people know about workers’ comp and excess insurance. You don’t actually have to buy all your excess coverage from one provider.
You can spread it among many different carriers in what is known as layering. Basically, this means that you can have one insurer covering $500,000 to $1 million and another covering $1 million to $2 million, and so on.
Why does this work? Simple, risk. The closer a layer is to the point where claims happen, the higher the risk.
The first layer, the one that sits right on top of your primary policy, is the one most likely to be used. As a result, insurers will likely charge a higher premium for it.
The next layer only activates once the first layer has been completely exhausted by a claim. And since that doesn’t happen very often, those higher layers are cheaper. Lower risk leads to lower premiums.
If, on the other hand, you bought your whole limit from one insurer, say a full 10 million dollars in excess coverage, you’d pay the same average rate all through. And that rate is usually higher than what you’d pay if each layer were priced based on its actual risk.
3. Use Data to Guide Your Coverage Choices
In today’s business world, gut feeling, as important as it is, is no longer enough. You need data. In fact, data is essentially the most powerful tool in your cost containment toolkit.
The good news is you don’t need anything fancy to get started. Just have accurate claim records and someone who knows how to pull insights from them, and you’re good to go.
AI has also made things a lot easier than they used to be. There are now tools that can help you look at your claim history, spot patterns you might miss, and even highlight future risks. One study published in ClaimsJournal illustrates this perfectly: out of 4 million claims, AI found that 15% of injury causes were misrecorded or had missing data.
When you think about it, that’s a huge blind spot. And if the data isn’t right, you could be making decisions based on the wrong picture. But when you understand your data, you can size your excess limits with near accuracy and avoid unnecessary spending.
Conclusion
As you can see, keeping your workers safe and your costs under control is very possible. It’s all about being strategic about how you use excess insurance, and hopefully, this article has shown you how to do just that.
Remember the key points:
- Set the right attachment point
- Layer your coverage
- Make data-backed decisions
So do these and do them well, and you’ll build a sustainable long-term plan that’s cost-effective and protects both your people and your business.