Paying More Per Unit of Risk- Small Business Workers Comp Policies
Where can I find small business Workers Comp coverage? Are there any less expensive options? What is the maximum number of employees that I can hire without having to fund a small business Workers Comp policy? These questions will be answered later in this article. The maximum number of employees question will be covered later this week in a separate article.
I receive these questions multiple times per year – more in December and early January each year when entrepreneurs are surveying the cost landscape of starting an enterprise.
Size Definition of Small Businesses
Two different governmental organizations – the SBA and IRS have two different size numbers for small businesses. The SBA says any company that has 500 or fewer employees is a small business with exceptions for size and gross receipts. The IRS defines a small business as an enterprise with assets under $10 million.
Usually, the definition in workers comp premium dollars is $50,000 or lower – my definition.
Small Business Workers Comp Coverage Options
The usual way to find any Workers Comp coverage is by Googling local insurance agents. You may have one for your personal auto, home, and other types of personal insurance. The agent may be a good starting point. Your company will likely require more than just workers compensation insurance.
If your company belongs to an association (cost saver) check with the agents that are part of the association. The association or members of the association may be able to recommend an insurance agent or agency.
Expensive Small Business Workers Comp Options
This question remains one of the toughest to answer.
Small businesses do not have that many options:
- Large Deductible – for larger businesses
- Self-Insurance – for very large businesses
- Micro-captives – possible but the IRS has been heavily scrutinizing this type of coverage recently.
- Package – included with other business coverage such as a Business Owner’s Policy, a less expensive option than standalone
- Standalone policy – most small businesses are covered with standalone policies, expensive option
- Insurance search engines – one of the better alternatives such as Pie Insurance. Three minutes will generate a policy quote
- PEO – an option that I have recommended often in the past for small businesses with high Experience Mods that result in very expensive coverage.
Why Do I Pay More Than Larger Businesses?
The WCIRB (CA Rating Bureau) provided a good reason –
Predicting whether or not a specific business within this large group of businesses will experience a workplace accident, however, is more difficult. This is especially true for small businesses. The statistical chance of incurring a workers’ compensation claim for any single small business within a large group is small, and an experience modification based on this loss history is less reliable than it would be for a large business.
Bottom Line on Small Business Workers Comp Policy Risk
The premium on a small business workers comp policy is usually higher because the risk is greater than the premium. A $175,000 claim can be absorbed by a large business workers comp policy. A small business workers comp policy cannot absorb the claim.
This means that a small business needs to work harder to find coverage at a reasonable price.
What made me write this article was that I have two clients, one a large business, the other one small. I reviewed their workers comp insurance programs for January 1st renewals. Both companies had the same classification codes in the same state. The small business workers comp policy charged them over 200% more per unit of risk for the same coverage.