Suppose you try to purchase a workers compensation policy in the standard market but no insurer will sell you a policy. This will create a dilemma since most states require employers to purchase workers compensation insurance. Fortunately, you'll have an alternative: You can secure coverage from your state's assigned risk plan.
What Is an Assigned Risk Plan?
Assigned risk plans are established by the states as a safety net for employers that are unable to obtain workers compensation coverage from "regular" insurers. They are the market of last resort for employers that would otherwise have no source of coverage. All states except monopolistic states have established a plan. The law in each state determines how the plan is administered and financed. Assigned risk plans are also called the residual market.
The monopolistic states don't need assigned risk plans because all employers in those states are required to secure workers comp insurance from a government-operated fund.
States have created assigned risk plans so that all employers can obtain workers compensation insurance. The ultimate goal is to ensure that employees who are injured on the job will receive the benefits entitled to them by law.
Why Might Workers Comp Coverage be Hard to Obtain?
Here are some reasons why an employer may have difficulty obtaining workers compensation insurance from a standard insurer:
- Poor loss history: If a business has sustained many small losses or a few large ones, underwriters may assume its management doesn't care about safety.
- New business: A new company is difficult for an underwriter to assess because it has no track record.
- Very small business: A very small company may not generate enough premium to compensate for the risk of claims.
- Hazardous occupation: Many insurers are unwilling to provide workers compensation coverage to employers in risky occupations like logging, trucking, and roofing.
Who Administers the Assigned Risk Plan?
All states have designated an administrator that operates the plan and oversees the issuance of policies. In most states, the administrator is one of the following:
- The National Council on Compensation Insurance (NCCI)
- The state competitive insurance fund
- The state rating organization or another third party
The NCCI administers plans on behalf of 22 jurisdictions. Each of these states requires all workers compensation insurers that operate within its borders to participate in the assigned risk plan. Insurers may either join a multi-state reinsurance pool or serve as a "direct assignment" carrier. When an insurer participates in a pooling arrangement, it may act as a servicing carrier (issuing policies and paying claims) or provide reinsurance to servicing carriers. If an insurer chooses the direct assignment option, it must agree to accept and retain all risks assigned by the NCCI. The direct assignment insurer pays all losses incurred by the assigned employers and is not reimbursed by reinsurance.
In 14 states, the assigned risk plan is administered by the state competitive fund. Examples are California, New York, and Montana. Most of the remaining states have designated their rating organization or an insurer as their plan administrator.
How Can You Get Coverage?
If you or your insurance agent is unable to secure workers compensation coverage for your business in the standard market, you or your agent may submit an application to your state's assigned risk plan administrator. The application procedure varies by state. If the plan in your state is administered by the NCCI, you can apply online 24 hours a day or mail your application to the NCCI via the U.S. Postal Service.
If the plan in your state is administered by a state fund or rating organization, check the administrator's website for application instructions.
To obtain coverage in the residual market, you must have applied for coverage and been rejected by one or more insurers. The number of required rejections varies by state. For instance, employers in West Virginia can apply for coverage in the assigned risk plan only if they provide evidence of rejection by two insurers.
Pros and Cons of Assigned Risk Plans
The primary advantage of an assigned risk plan is that it provides coverage to employers that can't obtain insurance in the standard market. One major disadvantage is cost. Employers insured in the residual market generally pay higher rates than those insured in the voluntary market. Those whose experience modifier is greater than 1.0 may also be subject to a surcharge. In addition, some states have eliminated the premium discount on assigned risk policies. An example is Massachusetts. A premium discount is a credit applied when the premium exceeds a certain threshold.
Another drawback of assigned risk plans is that employers can't choose their insurer. Their policy is issued and managed by the plan administrator or servicing carrier. A third disadvantage is limited coverage. Policies issued in the residual market may not be as broad as those purchased from standard insurers. For instance, many policies afford no coverage for operations the employer undertakes in states other than the one where the policy was issued.
- Assigned risk plans serve employers that can't find workers comp coverage in the standard market.
- Most plans are administered by the NCCI, a state insurance fund, or a state rating agency.
- Policies purchased from an assigned risk plan are generally more expensive and provide less coverage than policies obtained in the standard market.