Assigned Risk, Residual Market, Pool and Voluntary Workers Compensation – What’s The Difference?

Workers compensation insurance, for most states, is a mandatory coverage dictated by state statute and directed by some type of advisory organization. Employers are required to provide workers compensation coverage for their work force. Simply stated, it’s required by state law, you must have it!

In most states workers compensation  may be secured by qualifying as some form of a self insured under the states very strict guidelines (usually reserved only for very large, very sophisticated employers) or more commonly by purchasing coverage from an insurance company. Because workers compensation is mandated by state statute there must be a delivery system in place for all employers to access coverage and that would be the Residual Market, Assigned Risk or Pool. Call it what you want, these terms really mean the same thing.

When an insurance company sells workers compensation coverage on the open market they are known as a voluntary market provider. The voluntary market for workers compensation is then made up of all insurance companies who provide workers compensation directly to their clients. It’s a competitive market where these insurance companies get to choose the clients who they want to provide coverage. 

Here’s a few characteristics of a typical Voluntary Market insurance client:

  • In business for over three years;
  • Exhibits stable management with low employee turnover;
  • Insured with no lapse or gaps of coverage within the last three years;
  • No losses or claims;
  • Low EMR or Experience Modification Rate;
  • Exhibits an organized and safe workplace;
  • No high hazard work operations;

The Assigned Risk, Pool or Residual Market is a delivery mechanism put in place, administered either by an individual state organization or through an advisory organization such as NCCI, to provide workers compensation to those employers who may not qualify for coverage through the voluntary market.

Here’s a few characteristics of a typical assigned risk, pool or residual market insurance client:

  • New in business
  • Unable to provide evidence of stable management or exhibits high employee turnover;
  • No track record of continuous prior coverage;
  • A poor history of losses or multiple claims as evidenced on client loss history;
  • High or out of control EMR or Experience Modification Rate;
  • Operations include high hazard work;

Assigned risk programs are considered the market of last resort. Think about it. If the state requires coverage be secured and the voluntary market place will not write insurance on the employer, for whatever valid reason, where else can they go to buy workers compensation coverage? So it’s off to the market of last resort for many employers.

You may ask, “What’s the big deal about having workers compensation coverage provided by the Assigned Risk Plan?”

Here’s a short list of disadvantages an employer may suffer when their only choice is the “Market of Last Resort:”

  • High Rates – The assigned risk plan is not a competitive market like the voluntary market place. Employers who wind up having to secure coverage through this program usually have something wrong that makes them an undesirable risk. Rates will be much higher and the employer will pay a much higher premium.
  • No Choice of Insurance Company – The servicing carrier is usually assigned to the employer with no choice on the employers part.
  • Limited Pay Plan Options – Most smaller premium assigned risk clients are presented with no payment plan. Deposit premium is due in full. Pay plan options are only available for larger premium levels.
  • Mandatory Loss Sensitive Rating – If the calculated premium is large, usually somewhere over $200,000, the guaranteed cost option is no longer available and the policy must be written on a loss sensitive rating plan basis. That’s where the insured client, in some form, is responsible for paying the actual losses incurred. Not usually an employer friendly situation.
  • ARAP Factor – Assigned Risk Adjustment Program rating factor will be applied. This is another rating factor that is calculated along with the Experience Rating Factor. The maximum is typically 25%. So here’s what can happen. Let’s say an employer has a 1.5 EMR and a 1.25 ARAP with a payroll of 200,000 and a rate of $20/100. Premium calculation would look something like this: 200,000 x $20 / 100 = $40,000 x 1.5 = $60,000 x 1.25 = $75,000. In this simple example the ARAP accounts for an additional $15,000 in premium!

So by now you get the idea. There’s night and day difference between Assigned Risk Programs and the Voluntary Market.

Hope this helps you out and thanks for reading!