Workers’ Comp – What is a Dividend?

Dividends have been available in the Worker’s Comp world for a long time.  They are a great way for an insurance company to reward a client for good performance.

As with most insurance products, some companies offer more aggressive plans than others.  It is always recommended that you consult an agent that is well-versed in workers’ compensation dividend plans in order to make the best decision possible for your company.

Many clients are skeptical when they are first shown the dividend plan that a carrier is offering them.  If they are new in business or have never been offered a dividend plan in the past, it is understandable.  In order to educate the average business owner on why a carrier offers dividends, it is important to explain how a workers’ compensation carrier makes money.

One of the most important measurements in the world of workers’ compensation is the loss ratio.  The loss ratio is a very quick and easy calculation that basically shows the carrier how much money they are making on any one account.  The loss ratio is calculated by dividing the total dollar amount of a company’s losses into the total amount of premium that client has paid to the carrier.  We can address things like reserves, total incurred and IBNR in more in-depth articles down the road.  For purposes of this explanation, we are using the simple calculation of total losses divided into premium.

The threshold of profitability for a workers’ comp carrier is 65%.  That means that if your company pays $100,000 in premium, you can have up to $65,000 in losses and the carrier will still maintain a profit.  Obviously, you don’t want to have too many of these years for your own good, but it is important to know that the carrier is able to absorb that much.

If the carrier is profitable up to 65%, they obviously want to encourage their clients to be as profitable as possible.  They also want to keep those clients.  Enter the dividend.  Because of their threshold of profitability, most carriers offer dividend plans that will give the client a payback at up to a 50% loss ratio!  They aren’t going to give you more than about 1% of your premium back at 50%, but I have seen it done.  The lower your loss ratio, the higher the dividend you will receive.  I have seen plans that will give a client 55% of their annual premium back if they have 0 losses in the year!  This is a great reward to the client.  It’s also a great way for a carrier to keep profitable business.

It is important to note that dividends are not guaranteed.  While it is extremely rare that a carrier does not declare a dividend, they do make it very clear that it has to be approved by the board of directors.  A good agent will be able to tell you how many years in a row the carrier has paid dividends.  An excellent agent will help you analyze your company’s loss history to project the type of dividend you may qualify for with a pretty high level of confidence.  As with any other insurance policy your company buys, having a good agent that understands your business and the coverage is paramount.