Workers Comp Term Of The Day - Payout Profile

This is becoming very important to recently founded Captives. The first few years that a Captive is in existence are the make or break years. LDF's (Loss Development Factors) go hand-in-hand with payout profiles.

The profile is actually a schedule illustrating the typical rate of dollars paid out in claim settlements over time. The three insurance entities that must see this data as critical are:

• Reinsurers - when analyzing the funding risk for their insureds
• Captives - the tax advantages can be enormous
• Self Insureds - inaccurate funding has contributed to some of their failures

One client that we recently analyzed found that their funding techniques for a large deductible program were not accurate. Their payout profile indicated they were spending 80% of their Workers Comp dollars on claims in their third year. This was due to the settlements of denied claims.

Payout profiles and LDF's usually have a time horizon of 10 years. I recommend 15 years as a final backstop. A highly accurate LDF or payout profile will enable a company to invest for the maximum ROI (return on investment). As the stock markets have fallen appreciably over the last few years, the margins on investments are very thin.