All Workers’ Comp Dividend Plans are Not Created Equally

By Angelo Ganguzza, Vice President & General Manager – Brokerage Operations

When purchasing workers’ compensation insurance, many businesses consider dividend plans to help save on their premium. A workers’ compensation dividend plan is a method used where qualifying employers can share with the insurance company in the profitability of their account. Simply put, these dividend plans reward employers for having fewer claims.

A workers’ compensation dividend plan works like any other workers’ compensation policy. A business owner purchases a policy, pays the premium, and the insurance company covers injured workers’ medical expenses and lost wages. However, with a dividend plan, the policyholders may get a dividend back at the end of the policy’s term. Dividend plans are controlled by each state through legislation and department of insurance rules. These policies reimburse a percentage of your premium payments at the end of each policy’s term.

Types of Dividend Plans

There are three basic types of workers’ compensation dividend plans: flat, variable, and combination.

Flat

A flat dividend plan pays you a specified percentage of your premium for the policy period. Your dividend is not affected by your loss experience during that period. For example, suppose you enrolled in a 6% flat dividend plan for the 2022-2023 policy term. Thirty days after your policy has expired your insurer performs an audit. If your earned premium is $10,000, your dividend will be $600. You will receive the dividend even if you incurred substantial losses during the 2022-2023 policy period. However, your insurer may refuse to enroll you in the dividend plan for the 2023-2024 policy year due to your poor loss experience.

Sliding Scale (Variable)

A sliding scale dividend plan (also called a variable plan) is loss sensitive. This means the dividend you receive at the end of a policy year depends on the losses you incur during that year. The dividend grows as your premium increases and your loss ratio declines.

Combination

Combination plans include elements of both a flat dividend and a sliding scale plan. For instance, an insurer might pay a 10% dividend if your earned premium is at least $5,000, and a 15% dividend if your premium is at least $10,000 (and so on up to a specified premium). Combination plans usually specify a maximum loss ratio. If your loss ratio for the policy period exceeds the maximum, you will not receive a dividend.

Dividends Are Not Guaranteed

It is important to note that insurers cannot guarantee that a dividend plan will actually pay a dividend. The decision to pay (or not pay) is made by the insurer’s board of directors. The board may veto a dividend for reasons such as the insurer’s poor financial results.

While dividends are not guaranteed, these types of plans are a great way to incentivize business owners to implement safety programs in their business. Not all insurance companies offer dividend plans but when they do it’s a great way for an employer to participate in the profit of their policy with the insurance company. As you can see these plans can help businesses who historically maintain low loss ratios to reduce their overall costs for workers’ compensation coverage.