A workers’ compensation dividend plan, or participating plan, is a way for employers to take part in the profits earned by their insurers. Basically, dividend plans reward employers for having fewer claims, and many employers choose them to save on their workers’ compensation insurance.
How Workers’ Compensation Dividend Plans Work
A workers’ compensation dividend plan works like any other workers’ compensation policy. What makes a workers’ comp participating plan different is that policyholders may get a dividend back.
This is how it works: a business owner buys a workers’ compensation policy from an insurer that offers dividend plans and pays the premium. When the policy expires, the insurer audits the policy as it would with a regular workers’ comp policy. Part of this audit is an evaluation of the policy’s loss ratio.
Loss ratio: At its most basic, it is how an insurance carrier measures a policy’s profitability. Carriers determine the loss ratio by adding up all claims and dividing the total by the premium paid. If your company is claims-free, this helps increase the likelihood of a dividend.
Once the insurer determines the policy is profitable and the insurance company board or directors approve a dividend, it sends a dividend to the business owner. This can take up to six months after the policy’s expiration date.
Qualifications for Workers’ Compensation Dividend Plans
Each state’s legislature in conjunction with the state-level department of insurance controls how dividend plans function. That said, not every company is eligible for a dividend plan.
Employers usually have to meet certain requirements to buy a policy and receive a dividend. While the rules vary by state and insurer, there are several qualifications a business usually must meet. The most common eligibility requirements include:
- The policy must stay below a maximum loss ratio—usually under 50%.
- The policy must remain in force for the entire policy year.
- The employer must pay the premium in a timely manner and be up to date when the dividend is due.
- The employer’s earned premium meets a minimum amount.
Earned premium: When a premium is first paid, often in full at the start of the policy, it’s considered unearned. Once the insurer fulfills its contractual obligation to cover the losses listed in the policy (i.e., once the policy expires), the unearned premium becomes an earned premium.
Types of Workers’ Comp Participating Plans
Dividend plans usually follow one of three payout structures. These are flat, variable, and combination.
1. Flat
A flat dividend pays a defined percentage of the total premium that is determined at the start of the policy period. This is paid out no matter what sort of losses occur. For example, if the premium is $10,000 for the policy period with a 4% flat dividend, the business owner receives $400 regardless of what the losses were during that period.
2. Variable
Sometimes called a sliding scale dividend structure, a variable plan is based on the losses the policyholder incurs during the policy term. Generally speaking, a higher premium and lower loss ratio translates into a higher dividend.
For example, if your premium is $10,000 and your loss ratio is under 10%, then your dividend might be 5%, or $500. A loss ratio of 50% might drop your dividend down to just 2%, or $200.
However, remember the amount of premium paid also plays a role in your dividend. So if your premium is $20,000, your dividend could be 12% with a low loss ratio or 3% for a higher one. The specifics depend on how your insurer structures its plan.
3. Combination
The combination, just like it sounds, is a dividend structure that uses elements of both the flat and variable structures. You must meet a loss ratio; otherwise, you lose dividend eligibility but will also be rewarded for fewer losses.
How To Increase Your Dividend
The reason insurance companies like dividend plans is that they incentivize small businesses with workers’ comp to implement safety standards that reduce the chance of claims. While employers can’t control every injury that happens, they can control the overall safety of the work environment. By reducing claims, employers improve their loss ratios and ultimately increase their potential dividend payout.
The Challenges With Dividend Plans
First of all, only some insurance companies have them, so you may have to do quite a bit of shopping around to find a carrier that offers one in your state. Additionally, not all agents work with carriers that have dividend plans, so finding one isn’t necessarily easy. Once you find one, you should review the carrier’s history of dividends to understand the payouts. You can’t completely rely on past performance, but you can get an idea of what to expect.
Second, insurance carriers can’t guarantee dividends because they are a participation in profits. Any number of events outside of your control may cause your insurer to withhold payouts, including a severe uptick in claims or a downturn in the insurer’s investment portfolio. Moreover, payouts are authorized by the insurer’s board of directors. If the board is displeased with the carrier’s financial performance, then it can veto the dividend.
Alternatives to Workers’ Compensation Dividend Plans
Thankfully, despite the potential problems with a dividend plan, there are other options for businesses. There are two alternatives to a workers’ compensation dividend plan that ultimately serve the same purpose.
1. Retro plan
This examines your policy retroactively to determine if you meet a low loss ratio. If you do, then your premiums moving forward can be lowered. You don’t get a dividend, but you will pay less for insurance going forward.
2. Safety group
This is a popular option among nonprofit organizations looking for insurance. This pools employers that are similar in industry, size, and loss history.
Premiums are pooled together with an aggregate evaluation determining if the group, as a whole, had a favorable loss experience. If it did, the entire group is eligible for a dividend. The problem with a safety group is one business might have no losses and still be ineligible for a dividend because of other members in the group.
Frequently Asked Questions (FAQs)
This is a type of workers’ comp policy where, at the end of the term, the insurer pays dividends to the employer if certain predetermined criteria have been met.
Getting a dividend plan can be difficult as not every business will qualify and not every insurance carrier offers one. The best way to find a plan is to work with an agent and ensure the agent has access to insurers with dividend plans.
Create a safe work environment where the risk of an injury is low. Having no claims will increase the loss ratio and help potentially increase the eventual payout from the policy.
For small businesses, there are two big benefits from a dividend plan. The first is a safe work environment. Dividends encourage businesses to create a safe workplace to reduce the risk of injuries. The second is savings in premiums, which translate into money paid back to the employer.
Bottom Line
Workers’ compensation dividend plans allow a business to participate in the profits of its insurance carrier if it can keep claims down. When loss ratios are below an established threshold for the policy period, the insurance carrier sends the company a dividend upon completion of a policy audit. While dividends are not guaranteed, these types of plans are a great way to incentivize business owners to create better business safety programs.
