Workers’ Compensation Dividend Plan, Types, & Qualifications
Kimberlee has over 20 years of experience as a financial consultant and insurance agency owner. Her expertise is featured across Fit Small Business life insurance and business insurance content.
This article is part of a larger series on Workers' Compensation Insurance.
A workers’ compensation dividend plan, also known as a workers’ comp participating plan, is a policy that allows employers to take part in the profits earned by their insurers. At their core, dividend plans reward employers for having fewer claims. Many employers choose dividend plans to save on their workers’ compensation insurance.
How Workers Comp Dividend Plans Work
As far as insurance, a workers’ compensation dividend plan works like any other workers’ compensation policy. A business owner purchases a policy and pays the premium, and the insurer covers injured workers’ medical expenses and lost wages.
What makes a workers’ comp participating plan different is that policyholders may get a dividend back. Essentially, the process is the same. The 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. The business owner needs to have a good loss ratio to be eligible for a dividend. Once the insurer determines the policy was profitable and its board of directors approves a dividend, it sends a dividend to the business owner. This can take up to six months after the policy’s expiration date.
Loss ratio: At its most basic, a loss ratio 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.
Qualifications for Workers’ Compensation Dividend Plans
Each state’s legislature and the department of insurance control how dividend plans function, but employers usually have to meet certain requirements to buy a policy and receive the 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, such as once the policy expires, the unearned premium becomes earned premium.
Types of Workers’ Comp Participating Plans
Most workers’ comp dividend plans have one of three payout structures. It’s important to note that not all insurance carriers offer dividend plans, and those that do offer them do not guarantee dividends. The payout of dividends is contingent strictly on meeting the eligibility parameters and overall profitability of the provider.
Flat
A flat dividend pays a defined percentage of the total premium for the policy period 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.
Variable
This is also called a sliding scale dividend structure. It is based on the losses the policyholder incurs during the policy term. Generally speaking, a higher premium and lower loss ratio translate 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.
Combination
The combination dividend structure uses elements of both the flat and variable structures. You must meet a loss ratio otherwise lose dividend eligibility but will also be rewarded for fewer losses.
The Problems With Dividend Plans
There are some things to keep in mind when considering a dividend plan. First of all, not every insurance company has them, so you may have to do quite a bit of shopping around to find a carrier that offers one in your state. Plus, once you find one, you should review the carrier’s history of dividends to understand the payouts. You can’t rely completely 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 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, it can veto the dividend.
How to Increase Your Dividend
The reason insurance companies like dividend plans is because it incentivizes small businesses to implement safety standards that reduce the likelihood of claims. While employers can’t control every injury that happens, they can control the work environment’s overall safety. By reducing claims, employers improve their loss ratios and ultimately increase their potential dividend payout.
Alternatives to Workers’ Compensation Dividend Plans
Business owners have two alternatives to a workers’ compensation dividend plan that ultimately serve the same purpose. The first is the retro plan that looks retroactively at your policy to determine if you meet a low loss ratio. If you do, your premiums moving forward can be lowered. You don’t get a dividend, but you do pay less for insurance.
The other alternative is a safety group. 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.
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.
