Overview of Voluntary, Assigned Risk & Markets of Last Resort
Published 09-22-2016 into Pricing Factors of Workers' Comp
Market Type – Voluntary, Residual & Markets of Last
Resort
Every WC market needs a
back-stop, a market of last resort, for businesses that are unable to find
coverage in the general market. This can be due to poor loss history,
hazardous operations, new business venture, etc. Some states have established
an insurance ‘Fund’ to serve this
purpose. Other states have a program in which a business that is unable
to secure coverage from a carrier voluntarily (Residual) can submit to be assigned coverage with a carrier that
participates in the state’s ‘Assigned Risk’ program.
As you can imagine these
‘last resort’ options come with a higher cost in the form of higher
rates or additional surcharges and therefore
present opportunity to find unhappy prospects and/or prospects that should not
be AR or in a Fund.
AR Rates
As you would expect AR
typically carries higher rates than finding coverage voluntarily. In the
case of NJ’s Plan the rates remain unchanged but the insured is charged a
‘PPAP’ (plan premium adjustment plan) surcharge than can have a significant effect
on the Total Cost. In other AR markets, such as CT or NV, there is a LC
(or Rate, depending on state) for the Vol market and a set Rate for AR.
Let’s look at an example –
State
|
Class
|
Voluntary LC
|
AR Rate
|
Increase
|
NV
|
0005 (Farm, Nurs)
|
3.09
|
4.82
|
56%
|
*rates effective 6/1/16
There is usually a reason
businesses end up here, but there are also lots of opportunities to uncover
accounts that do not belong in the AR market.
State Funds (Markets of last resort)
In states that do not
participate in Assigned Risk there is typically a State Fund to act as a market
of last resort. These funds are usually subject to the same regulation as
a private insurer. If it is a competitive market where LCMs are filed,
the Fund will most likely file an LCM used for creating policy rates.
Whether or not you can
actually find their published LCM is a different story. Take NY for
example – the bureau provides a list of the Carriers’ LCM filings that is
readily available with a simple google search, but guess who isn’t on that
list…ever – the State Fund!
In most markets the State
Fund carriers file a relatively high LCM to account for its pool of
(typically) lower quality risks. In PA for example, the Fund’s filing is
2.789 (as of 8/1/16). The median LCM is 1.62 and average LCM is. 1.689 –
so the Fund’s LCM is 65% higher than the average and to be
expected.
In NY however, the Fund’s LCM
filing is 1.453 (1.27 as of 2018..wtf). The median LCM is 1.315 and average LCM being 1.311 – so
the Fund’s LCM is a mere 10% higher than the average. This seems
pretty competitive to me. (Wondering how I got their LCM if they don’t
list it in the previously mentioned document…magic, and lots of outside the box
research)
Side note – most State Fund’s
do NOT pay agents commission. Keep that in mind – you’ll either have
to add a fee or do it for free, as a ‘favor’ for the insured ‘giving’ you his
other lines of coverage…so kind of them to give the business to the person
responsible for saving them 15% and eliminating coverage gaps. I hope you
saved some magic for the renewal when their short-term memory kicks in.