Workers Compensation Dividend Plans
Many small business owners can save money on workers compensation insurance by enrolling in a dividend plan. A dividend plan rewards businesses that have successfully controlled their losses by paying them a dividend after their workers compensation policy has expired. The dividend represents profits earned by the insurer and shared with the policyholder. Because the policyholder is participating in the insurer's profits, dividend plans are often referred to as participating plans.
Dividend plans are overseen by state insurance departments. Most states require insurers to submit their plans to the insurance regulator for approval. The types of plans that are available vary from state to state and from insurer to insurer. Some insurers use plans have been developed by the NCCI while others use their own proprietary plans.
Premium and Loss Requirements
To qualify for a dividend plan, you must meet the minimum premium threshold specified in the plan. For some plans, your eligibility may also depend on your loss ratio. Your loss ratio is expressed as a percentage and is calculated by dividing your losses by your premium. Dividend calculations are based on your earned loss ratio. Your 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:
- Paid losses This is the amount of workers compensation benefits your insurer has already paid to your employees for injuries sustained during the policy term.
- Loss Reserves These are estimates of future benefits your insurer expects to pay for injuries sustained by workers during the policy period.
- 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.
Your earned premium is 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. The following example demonstrates how your earned loss ratio is calculated.
Suppose that you were charged a $6,000 premium at the inception date of a workers compensation policy that began on June 1, 2017. Your policy expired on June 1, 2018. Shortly thereafter, your insurer performed a final audit. Your 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).
An employee of your was injured during the policy period, and your insurer paid the worker $2,000 in benefits. Your insurer incurred $300 in expenses to adjust the claim. Your incurred losses for the period were $2,300 ($2,000 plus $300). 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 for the 2017-2018 policy term. After your policy has expired, your insurer calculates your earned premium and pays you a dividend of 10% of that amount. For instance, if your earned premium is $7,000, your dividend will be $700. Losses you incurred during the 2017-2018 policy year do not affect your eligibility for that year's dividend. However, poor loss experience might prevent you from enrolling in a dividend plan for the 2018-2019 policy 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
To see how a sliding scale plan works, suppose that your earned premium for the 2017-2018 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 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.
Dividends Are Not Guaranteed
Insurers that offer dividend plans cannot guarantee that their plans will actually pay a dividend. The decision to pay (or not pay) a dividend is made by the insurer's board of directors. If the board vetoes a dividend due to the insurer's poor financial results or some other reason, none will be paid. Thus, insurers 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.
While not actually dividend plans, safety groups pay dividends to members to reward them for good loss experience. A safety group is a program that pools premiums and losses of similar employers. If the group as a whole has a favorable loss experience, each member receives a dividend. The dividend is determined by the loss experience of the group, not of individual members.
Safety groups are designed for specific types of businesses, such as restaurants, automobile dealers, or construction contractors. To join a group, an employer must meet specific requirements with regard to class codes, minimum premium, and loss experience. If you are interested in joining a safety group, ask your workers compensation insurer if it offers one for your type of business.
When calculating your earned premium under a dividend plan, your insurer may include your experience modifier. For instance, suppose your earned premium is $10,000 and your experience modifier is .95. Your insurer may calculate your dividend based on a premium of $9,500 ($10,000 X .95).
Finally, businesses that join a safety group retain their experience modifier. Each member's modifier is calculated based on its own premiums and losses, not those of the entire group.