Term of the Day – Guaranteed Cost
A guaranteed cost plan is the most predictable type of insurance policy. In these policies, the premium is a fixed cost based on the final audited payroll, manual rates, and any applicable pricing programs. It is not subject to adjustment due to losses that occur during the policy term- instead premiums are charged on a prospective basis.
The usual Experience Rating Period does not count the most recently policy year. The period comes from the second, third, and fourth policies in the past. (Retrospective).
A rate is agreed on when the policy is created and is multiplied by the exposure base to yield the premium. The only variable affecting premium that should change between policy inception and audit is payroll. If the exposure base, for example: sales, is more or less than expected at the policy’s creation, the premium will be adjusted accordingly. Loss experience does not affect the premium.
A guaranteed cost plan transfers your risk to an insurance carrier. You pay a fixed rate for your term of coverage, but get no immediate reward for good risk management efforts or results.
Compared to other ways to insure for workers’ injuries, guaranteed cost has the least variability. However, other coverages may suffice at a cheaper rate.
2019 Update – California recently published a study that shows a self-insured 21% savings when compared to a guaranteed cost program. One of the self-insurance concerns is that a company is large enough to bear the direct cost of any major or a spate of accidents.
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