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Deductible and Coinsurance

Effective 1/1/92, Indiana law permits deductible and coinsurance options for workers compensation policies; examples given.;

Summary
Deductible policies are available under Indiana's rule set and competitive rating law. We have the Indiana statutory small deductible program for amounts $5,000 and less, and large deductible programs above that.
 
Carriers are supposed to report the full value of the claim to ensure ratemaking integrity. Also, Indiana is a gross reporting state, meaning we use the full amount of the claim in calculating employer experience rating modifications.
 
Carriers are required to file their larger deductible programs with the DOI.
 
 
Indiana Statutory Small Deductible Program 
Effective 1/1/92, Indiana law permits deductible and coinsurance options for workers compensation policies per IC 22-3-5-5.5.
 
Deductibles may be available from $500 to $5000 with premium reductions (as of 1/1/12) ranging from 1.4% to 20.8% depending on the deductible level and the risk's hazard grade.
 
A carrier may offer this coverage. It is up to the carrier to make the offer on these options. The statute says "(a) Each insurer entering into or issuing an insurance policy under IC 22-3-2 through IC 22-3-7 may, as a part of the policy or as an optional endorsement to the policy, offer deductibles or co-insurance, or both, that are optional to the insured for benefits under IC 22-3-2 through IC 22-3-7."

Note the reference to "benefits" here and throughout the statute. We conclude from this that claims adjustment expenses are not recoverable as part of the deductible.

The Indiana Code is available on the State of Indiana website at this address: http://www.state.in.us/legislative/ic/code/.
 
 
Because the statute leaves the decision with the carrier, our assigned risk servicing carriers may also offer or not offer these options. Our assigned risk rules do not address this matter nor could the rules preempt the statute. 

The servicing carrier will underwrite the request by considering items such as policy size, financial strength of the employer, and appropriateness versus the risk's loss history.

Indiana DOI issued Bulletin 72, dated 6/11/91 which explains the statute. Here's an explanation of the amounts allowed by law and the reasons for offering deductible and coinsurance options.

Deductible:
Deductible amounts are available in multiples of $500, up to a maximum of $5000 per claim. Here's how it works: if an insured has a $1000 deductible and there was a $23,000 claim, then he must pay the first $1000 and the carrier will pay the rest ($22,000). The deductible clause reduces the price of insurance by eliminating numerous small claims that are relatively expensive for the carrier to handle and encourages the insured to prevent losses. However, the total amount of the claim is used in the experience rating.

Coinsurance:
The coinsurance amounts are 80/20, meaning the carrier pays 80% of the claim and the insured pays 20%. Coinsurance applies to the first $21,000 of a claim, so the maximum amount an insured would pay on a claim is $4200 ($21,000 x 20%). A coinsurance clause reduces the price of insurance by the insured sharing in paying for the loss and encourages loss prevention.


Options
In Indiana, a carrier can offer one of four options to the insured:
1. offer nothing (no deductible and no coinsurance)
 
2. offer deductible program only
[carrier attach the Indiana Benefits Deductible Endorsement WC 13 06 04]
 
3. offer coinsurance program only
[carrier attach the Indiana Coinsurance Endorsement WC 13 06 03]
 
4. offer a combination of both deductible and coinsurance programs
[carrier attach the Indiana Coinsurance and Deductible Endorsement WC 13 06 02]


Premium
To determine the appropriate premium reduction:

1. Identify the hazard group for the class that produces the largest amount of estimated standard premium for Indiana
Refer to Basic Manual, Appendix E, Table of Classifications by Hazard Group.

Note: This code may be different from the governing class (which is defined as the class that produces the greatest amount of payroll).
2. Determine the appropriate reduction percentage
Refer to Basic Manual, Indiana rate pages, Miscellaneous Values, Premium Reduction Percentages.

Note: The first table shows "With Coinsurance." The first row of that table is a $0 deductible, which indicates 'coinsurance only'.
3. Apply the reduction percentage to total manual premium. Manual premium is calculated by taking the remuneration times the advisory or carrier rate.

Per the statute, the premium reduction is calculated by applying the appropriate reduction percentage to the premium before "experience or schedule modification, premium discounts, or retrospective rating plan."


Claims
The carrier must pay the claim and then be reimbursement by the insured for the appropriate amount within 30 days notice from the carrier that payment is due.

The total amount of the claim is reported and used in the Indiana experience rating. Indiana is considered a "gross reporting" state versus a "net reporting" state for experience rating. Please see the "Gross vs. Net Reporting" section below for more information on this topic.

The example below shows how to calculate the insured's portion of a claim. The coinsurance and deductible provisions apply on a per claim basis. The deductible is applied first and the coinsurance provision is then applied to the balance of the claim.

Claim Example = $23,000
Coinsurance % = 20%
Coinsurance max = $4,200

Amount
Steps
$23,000
1. Start with total claim amount
$1,000
2. Pick a deductible & subtract from the total claim amount
$22,000
3. Result = remainder of claim after deductible
$4,400
4. Multiply remainder of claim after deductible by .20 coinsurance factor
$4,200
5. Result = coinsurance amount (maximum of $4,200 per law)
6. Add the two results: remainder of claim after deductible + coinsurance amount
$5,200
7. Result = total insured portion


Table of All Deductible Choices
(Insured Portion of $23,000 claim)

Deductible
Coinsurance
Maximum
Total
0
4600
4200
4200

500

4500

4200

4700

1000

4400

4200

5200

1500

4300

4200

5700

2000

4200

4200

6200

2500

4100

4100

6600

3000

4000

4000

7000

3500

3900

3900

7400

4000

3800

3800

7800

4500

3700

3700

8200

5000

3600

3600

8600



The attached spreadsheet will do the calculation example for you.
(Note: if our system asks you for a user name and password, just click on "cancel" and the spreadsheet should open.)


Gross vs. Net Reporting
In Indiana, the total amount of the claim is reported and used in the experience rating. Indiana is considered a "gross reporting" state versus a "net reporting" state for experience rating. For a list of "gross vs. net" states, refer to the NCCI Unit Statistical Reporting Guidebook, Part 7 Exhibits. As of January, 2011, 16 states use net deductible programs, and 20 states use gross deductible programs (note some states are listed under both categories).

States with "Net Deductible Programs" (see manual for state specific notes)
Alabama, Colorado, Florida, Georgia, Hawaii, Idaho, Iowa, Kansas, Kentucky, Maine, Missouri, New Mexico, Oklahoma, Oregon, South Carolina, South Dakota

States with "Gross Deductible Programs"
Arizona, Arkansas, Connecticut, Florida, Illinois, Indiana, Maryland, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia. 
NCCI Actuarial Committee reviewed the topic in early 2003. The attached document titled "Net of Deductible Experience Rating" contains a good explanation of the issues.


Statistical Reporting
The Statistical Plan - 2008 Edition Rule 6-E explains how carriers must report deductible programs under the new Unit Report Expansion (URE) program. For Indiana the reporting requirements are summarized below:
 
Report Item
Choice for Indiana
Category:
Claim Deductible
Premium Credit Table:
Hazard Group % of Class with Most Premium
Experience Rating:
Gross (statistical code = 9664)
Deductible Type Coding:
Position 1 = 03;
Position 2 = 01 if ded only, 06 if coins only, 07 if both
Deductible Amount per Claim Field:
$500 - $5,000 (in $500 increments)
Deductible Amount Aggregate Field:
$21,000 ($21,000 x .20 = $4200 insured max)
Deductible Percent Field:
20%

Please open the document titled "Reporting of Deductible Programs" for more detailed info on reporting.


Employer Failure to Reimburse Carrier
IC 22-3-5-5.5  Deductibles and co-insurance

“(d) The payment or nonpayment of a deductible or co-insurance amount by an insured employer to the insurer shall be treated under the policy insuring the liability for worker's compensation in the same manner as payment or nonpayment of premiums is treated.”

So, it appears that if the employer fails to reimburse the insurer, the insurer may follow the law regarding nonpayment of premium and cancel the policy.


Large Deductibles
Carriers may file their large deductible programs with the Indiana DOI. The ICRB does not file a large deductible program.

Large deductible policies are generally defined as those with deductible amounts of $100,000 or more. They came into use in 1989. For a premium credit around 75-85%, an employer agrees to cover a per-claim or per-occurrence deductible of at least $100,000. These policies are designed for large employers. This alternative can be attractive to both employers and carriers. Employers realize reduced premiums and many can lower their claim costs through safer workplaces and loss control programs. Carriers save on taxes and assessments, as well as through the employers' increased incentive to control losses.

Since 1990, countrywide large deductible policy credits have grown quickly. Credits were estimated at:
1990 $ 600,000
1993 $6,300,000
1997 $7,300,000

NCCI estimates that countrywide premium volume was 28% lower in 1997 than it would have been without large deductible policies. Premium is about 83% less, on average, for policies with large deductibles than those with full coverage premium. The recent increase in expense ratios are mostly attributed to large deductible policies because of the corresponding decrease in the premium base.
 
For an overview on large deductibles, read the Advisen Ltd paper titled "Challenges in Collateralizing Large Deductible Programs" from July 2012. 
 

Other States With Small Deductibles
For a list of states and their respective plans, refer to the IRMI Manual of Rules, Classifications and Interpretations For Workers Compensation Insurance, Section XI.D.3., Exhibit XI.D.2.


Loss Elimination Ratios (LER)
LER's appear in the rate pages, Exhibit V, Miscellaneous Values - Advisory Loss Costs. For what are the Loss Elimination Ratios (LER) used?

These data are calculated and published to allow carriers that file loss cost multipliers to compute Premium Reduction Percentages (PRP). The LER's do not include a safety factor.

The Safety Factor recognizes:
1. Anti-Selection [selection of deductible coverage is likely to be adverse to the insurer].
2. Payment of certain indemnity (or medical) costs may be required outside of the deductible.
3. If the employer is unable to pay deductible costs, insurer is still obligated to pay total losses.

There exists a formula relationship to convert the LER's to advisory PRP's. This becomes somewhat technical procedure for actuaries. Please open the document titled Conversion from Loss Elimination Ratios to Premium Reduction Percentages for an example to help your understanding.
 


Related Files

The material in this document has been prepared and shared for informational purposes only and should not be relied upon as legal advice on any particular situation.