A Workers Compensation Dividend Plan – What It Is and How It Works

A workers compensation dividend plan is a method used where qualifying employers can share , with the insurance company in the profitability of their account.  You’ll find that Dividend Plans are controlled by each state through legislation and department of insurance rules. In this post you’ll learn about how these plans work and how they can benefit an employer in controlling their workers compensation cost.

Employers who have access to and who use these types of plans are compensated in the form of dividend payments based on how well their policy performed in regards claims and how profitable their policy has been to the insurance company. Payment of dividends to workers comp policyholders is a very common method used to adjust pricing of a policy after it expires.

There are a few types of Dividend Plans but one of the most common in use is the Sliding Scale Dividend.  Under a sliding scale plan the policyholder will be compensated on a percentage of premium based off a sliding scale of earned premium and loss ratio determined by the insurance company.

Typical eligibility requirements for participation in one of these plans will include:

  • An employers earned premium must be at some specific minimum level. It’s common to see a minimum premium of $10,000 being required for participation. However you may find some companies allow lower minimums and others require higher minimums.
  • A minimum acceptable loss ratio is required. Below 50% is typical. This is total claims paid, including reserves, divided by earned premium.
  • Your policy must remain in force for the full policy period.
  • All premium must be current and paid before the dividend is due.

Benefits for an employer using a Workers Compensation Dividend Plan:

  • Participating employers will realize a savings in premium for each claim dollar saved;
  • Promotes a financial incentive for the employer to promote safety;
  • Dividends can only reduce the price of a policy, there is typically no penalty to the employer for excessive or large claims other than not qualifying for the dividend;
  • Dividends of course are determined by each individual company but can be as high as 48%! That’s significant!

The downside of a Dividend Plan:

  • Not all insurance companies offer dividend plans;
  • Dividends cannot be legally guaranteed. You’ll find that individual state legislation and insurance department rules outline how dividend plans can be marketed to employers. These rules typically prohibit the inducement to purchase insurance based on participation in a Dividend Plan. In other words the insurance company cannot sell you a policy based on the idea that you will receive a dividend! 
  • Dividends are authorized solely at the discretion of the insurance company Board of Directors. The Board may decide not to authorize a dividend but again the decision is solely up to the Board.  Under most state rules this is a requirement for the plan to be considered a dividend plan.
  • Payment of past dividends is not a guarantee of future dividend payment.

As you can see there’s not much of a downside of for an employer using a Dividend Plan. They really don’t have anything to lose but the dividend and they’ree not guranteed anyway!

Here’s an example of how a plan works:

  • Your insurance company offers and you qualify for a dividend plan.
  • Six months after your policy has expired the insurance company calculates your dividend percentage. (All plans use a dividend date sometime after the policy expires usually between 6 and 12 months. This is so claims can be determined and final premium through audit can be established)
  • Your earned premium is $50,000.
  • Your loss ratio is %15.
  • Your dividend is 24% based upon your insurance companies sliding scale.
  • Your insurance company sends you a check or applies credit to your account in the amount of $12,000!

 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 an employer who historically maintains low loss ratios reduce their overall cost for coverage.

Hope this helps you out! Thanks!