The Billion Dollar Deductible
There are deductibles and then there are very large deductibles. Across the country we are seeing more use of large deductible plans for workers' comp coverage. Why? It's an easy way to qualify for what is virtually self insurance, without having to follow the stringent state regulations that govern self insureds. The absence of regulations makes this type of risk retention available to many insureds who might not otherwise qualify. There are significant risks, however, in this form of risk retention.
A crisis occurs when participants in large deductible plans cannot come up with the money to fund large losses. The liability passes to their carriers, who in turn may lack the resources to cover the losses. This unfortunate chain of events has bankrupted several carriers and a number of professional employer organizations (PEOs).
A joint task force of the National Association of Insurance Commissioners and the International Association of Industrial Accident Boards and Commissions is about to release a status report on large deductibles. They are struggling to create a framework which will enable this form of self insurance to flourish, while establishing credible and viable collateral standards to ensure coverage of any potential losses. Indeed, we may reach the point where the requirements for large deductible plans and self insurance are the virtually the same.
As for the $1 billion deductible, it's rumored to exist in Nevada (absolutely the proper venue!). This plan is simply a grandiose name for self insurance. Presumably, the premiums are minimal, as the chances of piercing the ceiling are almost non-existent. But that's not the issue: when the employees of an insured with this type of plan are injured, when a catastrophic loss occurs, or multiple injuries of a catastrophic nature, will the company be able to pay the benefits? The swagger of a $1 billion deductible is one thing, the prompt and lifelong payment of benefits is something else. State regulators - well represented in the above task force - want to make sure that they are not left holding the (empty) bag.
Senior Workers' Compensation Specialist