Workers Compensation Dividend Plans

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Business Owners Can Save Money With a Workers Compensation Dividend Plan. Getty Images/Hero Images

One way that small business owners can save on workers compensation premiums is to enroll in a dividend plan (also called a participating plan). Under a dividend plan, policyholders that have successfully controlled their losses are rewarded with a dividend payment.

The types of dividend plans that are available vary from state to state and from insurer to insurer. Some plans have been developed by the NCCI.

Others have been created by individual insurers.

Dividend plans pay dividends at the option of the insurer's board of directors. If the board does not declare a dividend, none will be paid. Thus, a workers compensation insurer cannot promise that you will receive a dividend. If a dividend has been declared, it is typically paid several months after a policy has expired.

Premium and Loss Requirements

To qualify for a dividend plan, you must meet the minimum premium requirements established by the insurer. For some plans, your eligibility may also depend on your loss ratio. Generally speaking, loss ratio means losses divided by premium with the result expressed as a percentage. Dividend calculations are based on earned loss ratio. Earned loss ratio is calculated by dividing your incurred losses by your earned premium for the policy year.

Incurred losses means losses you have sustained during the policy period.

To calculate your incurred losses, the insurer adds the following three amounts:

  1. Paid losses This is the amount of benefits paid to workers for injuries sustained during the policy term.
  2. Loss Reserves These are estimates of the benefits your insurer expects to pay for injuries sustained by workers during the policy period.
  1. Loss Adjustment Expenses These are expenses your insurer has incurred to settle claims arising from injuries sustained during the policy year. Generally, your insurer will include only those expenses that can be allocated to specific claims.

The term earned premium means the premium you were charged for a policy year based on your actual payroll. Your actual payroll is determined by a final audit that is completed after your policy has expired.

For example, assume that you were charged a $6,000 premium at the inception date of a workers compensation policy that began on June 1, 2015. After your policy expired on June 1, 2016, your insurer performed an audit. The insurer's premium auditor determined that your payroll increased during the policy period, generating an additional premium of $1,000. Your earned premium for the policy term was $7,000 ($6,000 initial premium plus $1,000 additional premium).

Suppose that your insurer paid $2.000 for an injury sustained by an employee during the policy year. Your insurer incurred $300 in loss adjustment expenses. Your earned loss ratio for the policy period was 33% ($2,300 / $7,000).

Types of Dividend Plans

There are three basic types of dividend plans available to small business owners: flat, variable, and combination plans.

 

Flat Dividend Plans

A flat dividend plan pays you a specified percentage of your earned premium for the policy period. The dividend is paid regardless of your loss experience during that policy period. For example, suppose you have enrolled in a 10% flat dividend plan. After the end of the policy period, your insurer pays you a dividend of 10% of your earned premium. If your earned premium was $7,000, your dividend would be $700. Losses you incurred during the policy year do not affect your eligibility for that year's dividend. However, poor loss experience might disqualify you to enroll in a dividend plan the following year.

Sliding Scale (Variable) Dividend Plan

Under a sliding scale dividend plan (also called a variable plan) the dividend you receive at the end of a policy year depends on your earned premium and your loss ratio during that year.

As the table below demonstrates, the dividend grows as your premium increases and your loss ratio declines.

                                                          Annual Earned Premium

Loss Ratio       5,000 to 10,000       11,000 to 20,000        21,000 to 30,000     31,000 to 40,000

0 to 10%                   35%                         38%                         41%                  44%

11 to 20%                  31%                         34%                        37%                   41%

21 to 30%                  27%                         30%                        33%                   36%

31 to 40%                  23%                         26%                        29%                   32%

41 to 50%                  10                            11                           12                       13

Over 50%                    0                             0                             0                         0

Suppose that your earned premium for the policy year was $19,000 and your loss ratio was zero. Based on the above chart your dividend would be 38% of $19,000 or $7,220. If your loss ratio was 15%, your dividend would be 34% of $19,000 or $6,460. You would earn no dividend if your loss ratio exceeded 50%.

Combination Plans

Combination plans include elements of both a flat dividend and a sliding scale plan. For instance, an insurer might pay a 10% dividend if your earned premium is at least $5,000 and a 15% dividend if your premium is at least $10,000 (and so on up to a specified premium). Combination plans usually specify a maximum loss ratio. If your loss ratio for the policy period exceeds the maximum, you will not receive a dividend.

Experience Modifier

When calculating your earned premium under a dividend plan, your insurer may include your experience modifier. For instance, suppose your earned premium was $10,000 and your experience modifier was .95. Your insurer may calculate your dividend based on a premium of $9,500 ($10,000 X .95).