Sports make great analogies:
For a large number of athletes that want to play sports after middle school, high school or college – intramural leagues offer a great opportunity. Intramural leagues accept all kinds of athletes: new athletes, old athletes, good athletes, bad athletes, etc. Conversely, people who are talented and want to continue to play sports AND are lucky enough to make it pro have a whole different set of options available to continue playing sports.
Intramural leagues accept all participants and normally have a fee to play. The fee pays for field time, referees, equipment, etc. On the other hand, professional sports pay players to compete. Just as there are two levels in sports: intramural and professional, there are two “levels” of workers’ compensation insurance in the market place: 1) the intramural version is the assigned risk pool where all applicants are accepted and applicants pay more money than option 2) the professional sports version. The pro version is where insurance companies are picky with who they offer insurance to. Although the insurance companies won’t pay you to have workers’ compensation coverage, the coverage in the professional version is much less expensive than the intermural sports version.
For the amount of risk insurance companies take on, they are extremely risk-averse.
Workers’ compensation is federally mandated. What does a company do when they can’t purchase workers’ compensation in the preferred or voluntary market? They turn to the assigned risk workers’ compensation market. It is the market for new in-business and high-risk business operations. All applicants are accepted in the pool.
The pool is a collection of insurance companies that each state requires insurance companies to take part in. The insurance companies in the pool don’t want to be in the pool. They get out as soon as they can, only to have another insurance company replace them. Insurance companies take turns providing insurance to the pool.
Reasons to be in the pool:
- New in business. Without a proven track record, how do you prove you are a claims-free safe company?
- Risky business operations i.e. roofers or tree trimmers. There is an exception to this – when a risky operation becomes large enough there are voluntary markets that are willing to write their workers’ compensation. Companies that are large enough, have enough premium to support claims.
- Ghost policies aka “if any” policies aka no payroll or zero payroll policies. This is common for businesses without employees, whose clients require workers’ compensation on a certificate.
- An experience modifier that is out of control – when a company has too many claims.