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Level of Reinsurance Mystery Self-Insured Critical Number

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Hidden Level of Reinsurance More Important During and After Pandemic

One of the least asked questions by self-insureds on their Workers Comp program – what is the most advantageous level of reinsurance for our program’s success?  Even though reinsurance is the “disaster or multiple disasters” insurance program, I usually have to bring up the subject with self-insured clients.

I am sure we all have heard the term long-tail COVID.  For more info, check out this academic article on long-tail COVID.

This article was generated after watching this video by AM Best on reinsurers.

If you have not subscribed to any of AM Best’s publications including AM Best TV, you are seriously missing out on great free information.

Level of Reinsurance – The Mystery Number Not Considered

NCCI and other rate bureaus define a large deductible plan as any that has a deductible of $100,000 or more.  I think the rating bureaus may add to that number soon if they have not already done so by the end of 2022 due to inflation.

I am not referring to a large deductible program as self-insurance.  The two terms are sometimes intermixed.   I am using the $100,000 as a baseline for the level of reinsurance in self-insurance.

If you have claims loss runs from the last 10 years your company is far ahead in finding the right level of reinsurance.  Why do I say this?  Loss Development Factors (LDFs) usually examine a 10-year timespan.   The likelihood of a workers comp claim extending beyond 10 years is somewhat remote.

Any time that you can look into the past 10 years and use that data  to forecast 10 years into the future, a 20-year business cycle is covered.

Mystery Number – Really?

The level of reinsurance to which I am referring is not the level where reinsurance kicks in per claim.  Not having the proper aggregate level becomes more important when no one claim reaches the level of reinsurance.  The aggregate level covers self-insureds when all claims total a certain number.    Let us look at a quick and dirty example –

A self-insured has a bad claims year:

  • 28 lost time claims
  • Average lost time claims value = $122,250.00
  • None reach the level of reinsurance of $250,000, so the level of reinsurance  (per claim) is not reached
  • 28 claims * 122,500 = $3.423 million (Ouch!) – out of pocket payments

Mystery Level of Reinsurance Is the Total Level = Aggregate

Rarely ever does a self-insured “bust their aggregate”.   In the above example –

  • 3.423 million in claims payments
  • The aggregate level of reinsurance = $2 million
  • Self-insured is responsible out-of-pocket for $1.423 million
  • Aggregate can be a company saver – remember to subtract the cost of the aggregate at this level to find the true number of the aggregate savings.

Why did I write this article?  I have the above example of a self-insured (numbers embellished) in front of me now – except to save reinsurance premiums, they set the aggregate level at $3 million.  Many of the above 28 claims were long-tail work-related COVID claims.

Related Articles –

Definition of Aggregate

Aggregate Alternate Definition

pic of covid-19 virus level of reinsurance

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2 Responses

  1. Thanks for helping me understand that the right level of aggregate for reinsurance would be needed for the claims. I guess it is importance to have reinsurance software when you work in this industry. The computations would probably be done faster and more accurately when there is an automatic process being used.

  2. Thanks for commenting. Reinsurance walks a fine line between over-reinsuring and under-reinsuring. I think self-insureds will need to rethink the old $250,000 level of excess insurance. Automated reinsurance levels is an interesting thought. Feel free to comment on any other articles.

Comments are closed.

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James J Moore - Workers Comp Expert

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Management Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications

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