Bringing Nonsubscribers into the Texas Workers’ Compensation System with Captive Insurance

By S. Lance McNeel, CPCU, ARM

Capstone Associated Services, Ltd.

What is the Texas Nonsubscriber Option?

There has been much discussion in recent times on the topic of workers’ compensation opt-out statutes making their way through state legislatures. Our good neighbors to the north in Oklahoma have passed such a law, but it was declared unconstitutional by the Oklahoma Workers’ Compensation Commission. That decision is currently being appealed. South Carolina and Tennessee have had bills stall in recent months, and only time will tell the outcome of these initiatives. And then there is Texas!

Early in the 20th century, the topic of how to protect workers from job-related injuries was hotly debated throughout the country. It was generally acknowledged that powerful companies had an advantage in cases where employees sued for work-related injuries. Defenses included contributory negligence, assumption of risk and the fellow servant rule. These defenses were limited by federal and state governments shortly after the turn of the century by the issuance of employer liability laws, however, these simply left employers as vulnerable as the employees were previously. A fair and equitable solution was needed that provided benefits to employees and protection to employers.

In 1911, Wisconsin passed the first workers’ compensation law followed quickly by most of the other states by the end of the decade. The initial Texas workers’ compensation legislation was passed in 1913, and yes it was elective from the beginning. The provisions for elective workers’ compensation resulted from real concerns in Texas that a mandatory workers’ compensation system was unconstitutional, since it limited both the employer’s and employee’s right to bring a lawsuit for damages. For this reason, both employers and employees in Texas have the right not to subscribe to the system.

There was little interest in opting out of the system, which generally worked well, until the 1980s when decades of attorney involvement in even minor claims and inflated medical costs pushed the system to the brink of collapse. During that time, over 40% of Texas employers looked to nonsubscription to avoid a corrupt system. Today, the Texas Department of Insurance estimates that 44% of Texas employers are nonsubscribers and 20% of Texas employees are employed by non-subscribing employers. Of those employers, the highest percentage of nonsubscription occurs in manufacturing (53%), finance (51%) and wholesale/retail (49%).  See: A study of Nonsubscription to the Texas Workers’ Compensation System; http://www.tdi.texas.gov/reports/wcreg/nonsub93.html1

Why choose not to subscribe?

Cost is the primary reason for choosing not to subscribe, however that goal can take different forms. Cost savings that can be realized through eliminating workers’ compensation premiums can often be replaced with a lower cost occupational accident policy. Many argue that the cost reduction is the result of far lower benefits to the employees, while others argue that the benefits are comparable and the cost reduction is based on the elimination of fraud and waste in the workers’ compensation system. An employer may also wish to have greater control over the choice of medical provider or to coordinate better with a group health plan. Finally, the employer may want to retain tort defenses that are given up under the workers’ compensation system. The common thread in these goals is to take greater control of an increasingly large expense facing the employer.

Why choose to remain in the workers’ compensation system? 

The primary reason to remain in the system is that if you leave, you no longer have the no-fault protections of the workers’ compensation system. Employers’ liability coverage can be purchased, but will it adequately protect the employer? Also, many employers have contractual relationships that require them to be covered by statutory workers’ compensation coverage. Examples of this include a sub-contractor agreement with the contractor, or a professional employer organization that is obligated to provide workers’ compensation. These businesses cannot choose to be nonsubscribers. Finally, many employers are in industries that are competing for qualified employees and do not want to give the appearance of providing sub-standard benefits to workers.

Is there a middle ground?

There are a couple of ways that employers can potentially reduce the cost of risk and increase control over their workers’ compensation program while staying with the system and thus maintaining their tort protection. One involves filing as a certified self-insurer (CSI), and the other makes use of a negotiated deductible with a standard insurer writing workers compensation in Texas. I say potentially because both methods rely on a level of risk retention that could result in favorable or unfavorable results.

Filing as a CSI with the Texas Department of Insurance is an option to employers that meet certain size financial qualifications including manual insurance premiums in excess of $500,000, approved credit ratings, the posting of a minimum-security deposit of $300,000 and the posting of excess insurance in the amount of $5,000,000. While this is certainly an attractive alternative for very large employers with professional risk management and claims staff, it is a difficult hurdle for the great majority of employers in the state of Texas.  See:  Certified Self Insurance; http://www.tdi.texas.gov/wc/si/

The other option is much more realistic for middle market employers throughout the state. Most insurers will offer a negotiated deductible option with a statutory workers’ compensation program. The deductible credit and other terms are negotiated with the insurer, and can represent considerable premium savings with the assumption of a large deductible. The advantage to this option is that the insurer retains the responsibility for providing statutory benefits to Texas workers and that responsibility is further supported by the Texas Property and Casualty Insurance Guaranty Association. The complexity of creating and maintaining a deductible program is much lower than a CSI, and with the addition of an aggregate stop loss, the catastrophic loss potential can be managed effectively. Essentially the insurer pays the worker’s compensation claims directly and then bills the employer for the deductible amounts (or withdraws them from an escrow account). If the employer becomes insolvent, the employees are still protected, which is why insurers typically want a letter of credit from the employer.

Negotiated deductibles are a good option for many employers that want the protection, both for the company and the employees, of the Texas workers’ compensation system along with lower long-term risk costs. Is there anything else that can be done to make this a better option?

The captive insurance/deductible option

Negotiated deductibles can be an attractive alternative for middle market employers with good claims experience, or those who have poor experience that have made an honest commitment to institute effective loss control measures. When an employer combines this option with a captive insurance company whereby the captive issues an insurance policy for deductible reimbursement, this attractive alternative becomes a powerful strategic planning tool.

A captive insurance company is an insurer that has been established to cover the risks of affiliated insureds. A captive can eliminate exclusions, deductibles and retentions in the traditional commercial insurance through the creation of policies designed for the specific insureds and risk exposures. A captive is formed with the permission of various regulatory authorities throughout the world. It is a real insurance company that has a responsibility to its owners, its insureds and multiple jurisdictions. An insurance commissioner monitors the captive’s operations to ensure that certain criteria are met, including solvency and other regulatory parameters. Texas passed captive legislation in 2013, which means that Texas employers no longer must go out of state to form a captive insurance company.

When structured properly by an experienced team of corporate and tax attorneys, and insurance professionals, premiums paid to the captive insurer are tax deductible as are other commercial insurance premiums. The premiums received by the captive insurer are taxed at 0% for federal income taxes. Claim payments from the captive to the employer are taxed at regular C corp. rates since the premiums were tax deductible when paid.

The deductible option described in the previous section uses after-tax money to reserve for claims and then allows for a tax deduction when the claim is paid. By adding a captive, pre-tax funds in the form of deductible premiums are used as reserves in the captive and then taxed when the claims payments are made; often years after the injury occurred. Better yet, underwriting profits of the captive are not taxed at the federal level. When profits are returned to the owners as capital gains or dividends, the capital gains or dividend rates will apply. The employer realizes a tax deferral from the timing of claim payments and a tax reduction on the profits through capital gains. In addition, the captive is a financial institution that can make commercially reasonable loans as an investment.

Finally, we are not suggesting that nonsubscription is wrong or should be avoided. In fact, captive planning fits nicely into a nonsubscriber program as well. We believe that Texas was the only state that actually got it right. We should not force employers or employees to give up cherished constitutional rights. However, a strong workers’ compensation system is critical to the economic stability of Texas and the protection of its citizens. We should encourage willing employers to remain within or come back to the workers’ compensation system through risk assumption, loss control and captive insurance.

 Please visit Booth 412 at the IIAT 120th Annual Conference & Trade Show in Fort Worth if you would like to learn more about captive insurance planning for your customers or prospects.

Mr. McNeel is Vice President of Business Development for Capstone Associated Services, Ltd. Lance brings over 30 years of experience in all areas of the insurance industry, including property and casualty insurance, life and health insurance, and reinsurance.

capstone-associated-logo

www.capstoneassociated.com

Posted in News, Sales & Marketing | Tagged , | Leave a comment

TWIA Reports Funding Available for Weather Events

The Texas Windstorm Insurance Association (TWIA) has announced its available funds in the event of a catastrophic weather event in Texas. TWIA has secured $4.9 billion in total funding for 2017. This includes $147 million that has been contributed to the Catastrophe Reserve Trust Fund, bringing the total of the fund up to almost $740 million. According to TWIA, this is the highest balance of the fund in the association’s history. The amount was released on Thursday, June 1, 2017, which is the first day of hurricane season.

Created in 1971 by the Texas Legislature, TWIA provides windstorm and hail insurance for certain properties on the Texas seacoast. It acts as a residual insurer for residential and commercial properties in designated areas of the coast where windstorm and hail insurance is not reasonably available.

Posted in News | Tagged | Leave a comment

Sen. Cornyn and Texas Legislators Join IIAT at Annual Conference

There’s still time to register for IIAT’s 120th Annual Conference & Trade Show in Fort Worth, June 15-17. Lately, it’s been hard to keep up with all the news coming from both the Texas and the nation’s capitol. Luckily, several legislators will be on hand at IIAT’s Annual Conference to help make sense of the legislative changes that will impact the insurance industry.

On Saturday, June 17, Texas Sen. Larry Taylor, Sen. Kelly Hancock and State Rep. Rodney Anderson will be the special guests at the 2017 Legislative Wrap-Up panel moderated by IIAT’s Director of Governmental Affairs Lee Loftis. Get the inside track on what is happening at the Texas Capitol and find out what new legislation means to your business.

sen-john-cornyn-r-texasLater in the day, Sen. John Cornyn will be the featured speaker at the Annual Celebration and Business Luncheon. IIABA President & CEO Bob Rusbuldt will host a candid conversation about politics and the insurance industry with Sen Cornyn. You won’t want to miss this exclusive event!

Register for IIAT’s Annual Conference & Trade Show before it’s too late!

Posted in Conference, Events | Tagged , | Leave a comment

Dress Codes in the Workplace

blog_male_dress_code_in_western_culture

Warmer weather often brings more relaxed dress codes — that’s if your agency hasn’t already adopted a more relaxed dress code year-round. According to a 2016 Employee Benefits Survey by the Society of Human Resource Management, 83% of firms have casual dress. Of course, what constitutes casual dress can vary considerably. Regardless of where your agency is on the work attire spectrum, managing dress code issues can be dicey.

Here are some recommendations:

  • Have a policy
    A policy communicates what is expected. If you haven’t communicated what’s expected, it’s hard to hold people accountable. Be careful with the policy to make sure it reflects legitimate business needs and is enforced fairly to avoid getting crosswise with the EEOC.
  • Consider customer impact
    Consider the significance of employee attire on brand perception, staff credibility and customer relatability.
  • Consider employee impact
    While studies show there is a correlation between dress codes and employee morale and productivity, there is no consensus on whether it’s positive or negative. That’s probably because it depends on other engagement and productivity factors. Ask employees what they think or put together an employee task force.

Additional resources and sources:

Posted in human resources, Uncategorized | Tagged | 1 Comment

In Selling, Seek First to Understand

pdp-scrolling-banner

This most important commandment of good salesmanship often goes unheeded. A common sales sin of an inexperienced salesperson is to immediately begin rattling off “unique” features of his or her products and services.

Unfortunately, what’s considered unique is usually standard offerings from virtually all other competitors. Rather than selling features which are pretty standard, a producer should seek first to understand rather than to be understood in an opening appointment.

Try asking these 10 questions:

  1. Do I understand the prospect’s industry and the issues that are most important generally?
  2. Do I understand the prospects specific strategic imperatives or what’s keeping him or her awake at night?
  3. Do I understand how my insurance and risk management services relate to the prospect’s strategic imperatives and what services are currently being purchased?
  4. Do I understand the quality of relationship the prospect has with the incumbent provider(s)?
  5. Do I understand the prospect’s shopping process?
  6. Do I understand what degree of follow-up contact is desired or expected?
  7. Do I understand how the buying decision will be made, who will make it, who will influence it?
  8. Do I understand what additional information the prospect will need to make a good decision?
  9. Do I understand what I have to do to get the business?
  10. Do I have a better than 60% chance to succeed?

For more tips, check out the Opening Appointment Questionnaire under Step 4 of the Sales Management Toolkit.

Train New Producers and Boost Agency Sales!

Better yet, if you’ve got a new or inexperienced producer, consider enrolling him or her into this summer’s Producer Development Program, sponsored by Texas Mutual. Students will not only get a solid foundation in commercial insurance but also learn how to apply the knowledge in selling situations. The program includes five days of technical training in commercial lines, five days of sales and marketing training and two-and-a-half days dedicated to guidance on building a quality book with mandatory ethics training for all licensees.

The Producer Development Program starts July 10. View the curriculum and register today.

Posted in Education, Sales & Marketing | Tagged , | Leave a comment

IIAT and SELECTIVE Join to Provide A New IIAT Advantage Program

IIAT and Selective are excited to announce they have entered into an agreement to provide an additional Advantage Flood Program for IIAT members.

SelectiveResponse288Rated “A” Excellent by A.M. Best, Selective has built a reputation for honesty, efficiency and quality service. It is among the top five WYO Flood carriers nationwide and has been a carrier endorsed by the IIABA since 2001.  Selective was one of the first companies to join the National Flood Insurance Program (NFIP) as a “Write Your Own” (WYO) carrier.

“Selective prides itself on an exemplary record of responsiveness,” says Selective Flood Marketing Manager Don Burke.

Selective has robust technology incorporating live chat, digital download, and ITV calculator, excess flood and elevation certificates. Plus, they provide a dedicated territory manager and underwriting team.

“Response is everything,” Burke says. “Customers can trust we’ll be there when they need us.”

For more information about this new IIAT Advantage program and how it might be a solution for your clients contact Flood Sales at 866-315-1579 or floodsales@selective.com.

Posted in IIAT Advantage, Markets, Partners | Leave a comment

Mid-America Insurance Conference Accepting Agenda Item Suggestions

The Mid-America Insurance Conference has been serving the American Agency System as a forum for discussion on topics such as property-casualty coverages, rules, forms and other technical aspects of the insurance industry since 1934. Each year, local independent agents from member states along with company representatives and ISO, NCCI and ACORD representatives get together to review agenda items submitted by agents.

If you have experienced a problem relating to coverage, claims, policy interpretations, audits, underwriting or other sources; you now have the opportunity to submit the problem as a possible agenda item for the MAIC. Use the agenda item submission form to submit your issue. Send the completed form to David Walker no later than July 1, 2017.

Posted in Events | Tagged , | Leave a comment

IIAT’s New Insuring Truckers Class Coming to a City Near You this Summer

truckers

IIAT’s new Insuring Truckers commercial lines CE class is designed to help agents and support staff understand the trucking risk and create new opportunities for insuring profitable trucking accounts.

Insurance for trucking risks can be extremely confusing to insurance agents unless they are prepared. Insurance professionals must have knowledge of trucking insurance as well as underwriting and compliance issues that are critical to motor carriers.

Many commercial auto insurance products used by non-specialists can quickly become errors and omissions claims. Understanding the exclusions as well as endorsements available to change policy coverage, as well as the MCS90 endorsement required by the Motor Carrier Act of 1980 is essential to proper insurance and regulatory compliance.

Topics covered in the class include:

  • Regulation and compliance for the trucking industry
  • Underwriting for the trucking industry by line
  • Primary Auto Liability
  • Non-Trucking Auto Liability
  • Physical Damage Coverage
  • Motor Truck Cargo Coverage
  • General Liability Coverage
  • Underwriting for non-standard proprietary forms

Insuring Truckers stops in a city near you!

The class costs $155 for members and is approved for 7 CE credits.
Austin – June 5 (sponsored by LevelFirst)
Houston – June 6 (sponsored by Litchfield Special Risks, Inc)
San Antonio – June 20 (Sponsored by LevelFirst)
Corpus Christi – June 21
Tyler – Aug. 15
Lubbock – Aug. 16

You must be logged in to iiat.org to register. Call 800.880.7428 to register by phone.

Posted in Uncategorized | Leave a comment

Kate Innocent Promoted to Vice President at LevelFirst

kateLevelFirst, the service-based wholesale broker and MGA binding facility owned by IIAT Services Co., is pleased to announce the appointment of Kate Innocent to Vice President.

The promotion coincides with Innocent receiving a Life and Health license.

Innocent joined LevelFirst in 2014 as Associate Underwriter and most recently served as Assistant Vice President. She also holds the designations of  Commercial Insurance Counselor and Commercial Lines Coverage Specialist.

“This is a well-deserved promotion and recognition of Kate’s dedication to both the company and clients,” says LevelFirst Executive Vice President April Moeser. “We also recognize her commitment to advancement and personal growth in pursuing the Life and Health license.”

Posted in News | Tagged , , | Leave a comment

Ready, Set, Go…Lend a Helping Hand at the ELITExas Olympics Community Service Project

IIAT’s Annual Conference & Trade Show is proud to host the ELITExas Olympics – A Community Service Project benefiting Big Brothers Big Sisters.

Don’t miss a morning of fun games and races at this special community service project hosted by ELITExas, Saturday, June 17.  Kids from the Big Brothers Big Sisters program will be participating in the competitions.

Learn More and Volunteer Now!

The ELITExas Olympics Community Service Project
Saturday, June 17th, during IIAT’s Annual Conference & Trade Show

Fort Worth Convention Center
8 – 10 a.m.

ELITExasHeader_Email Blast

Sponsored by
ELITExas 2016-17 sponsors-01

Posted in Conference, Uncategorized | Tagged , , | Leave a comment