NCCI Says PEO’s Questionable
NCCI says PEO’s questionable reputation. PEO’s (Professional Employer Organizations) have long received somewhat of a bad rap from many different sources. However, we have found them to be extremely helpful in aiding our clients in finding Workers Comp coverage in a difficult insurance market.
PEO’s have also been a great vehicle for cash flow management. We have often recommended that our clients include PEO’s in their renewals as a great alternative. Please note that not every PEO is one that a company should put their WC risk with as will be discussed in this article.
Last month at NCCI’s Annual Issues Symposium, the issue of PEO’s was brought to light. NCCI also found that PEO’s when used in the right circumstance are not these under-the-radar sketchy companies that seem to go bankrupt all of the time.
In contrast, many Workers Comp insurance carriers and self-insureds have gone “belly up.” PEO’s bad developments also seem to make front page news. Some of the highlights of the NCCI report were:
% of Market
- 1% – 2% of the voluntary market
- 2% – 6% of the residual market – higher number due to insurance placement difficulty
- 6% of the voluntary market in Florida
- 30% of the voluntary market in Arizona – surprising number
Reputation of Underreporting Claims Disproved
- Actually had higher number of claims – if claims were not being reported, frequency would be lower
- Loss Ratios tend to be lower – showing that underreporting and misclassifying are not problems with PEO’s
- E-Mods are comparable indicating no Mod manipulation
- No cherry-picking as industries mix same as regular market
- Loss ratios across industry groups are similar except for transportation industry
One of the negative connotations with PEO’s is they were responsible for three recent insurance company collapses. The counter for that would be – did the carriers not properly underwrite the PEO’s?
Single State PEO’s did not fare well. This could be attributed to the Law of Large Numbers. In insurance, there must be a large enough premium base to offset a rash of losses. The single state PEO’s may be affected by this phenomenon.
Multistate PEO’s seem to do better than the regular insurance market. This was an unexpected outcome which shows the Law of Large Numbers to be a true effect. NCCI went to great lengths to study premium volume.
Of the three large insurance company failures, lack of premium was the main cause. The Law of Large Numbers will bare its sharp teeth quickly when violated as with the three bankrupt carriers.
PEO Shortcomings (Very Few)
PEO’s seemed to have more litigation than non-PEO’s. As with TPA’s, claims handling must be monitored heavily by the company that signs up with a PEO. A large number of PEO clients would have not qualified for a Mod rating. Somehow, that is not really seen as a negative development.
Bottom Line – (not from NCCI report)
You know what works best for your company. NCCI or any expert may not provide you with the information needed to make a decision on a PEO. PEO’s are not for every company. You have to decide if PEO’s are worth investigating for possible WC coverage.
My recommendation is a PEO broker. There are a few shady PEO brokers – know who you are dealing with before making a final renewal decision. From a loss reduction viewpoint, they can easily be one arrow in your quiver to reduce your insurance costs.
Please note that we are not agents and do not directly place insurance policies. We are advisors.
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