Overview
A PEO cannot be risk averse if it hopes to achieve superior growth. After analyzing a group of PEO companies that have achieved substantial growth and size, none of them have been risk averse. This article will outline the benefits and risks of having a risk baring insurance platform. It will discuss the impact of a risk baring platform on service delivery, pricing, underwriting, deductibles, cash flow, channel partners and control.
Service Delivery
When a PEO has an internal high deductible insurance platform for workers’ compensation, health benefits or both, the risk associated with a high deductible will certainly influence its service offering. When a PEO assumes risk, it must protect against that risk. Utilizing a high deductible program will allow the PEO to become more price competitive but that comes at a potential cost. Therefore, the PEO must establish a service offering to protect against the increased insurance liability. The benefit to this approach is that the mitigation strategy is a benefit to the PEO’s clientele as well. When the PEO and its client have the same focus, to protect the assets of the organizations, the service offering will be aimed at achieving these goals. As a result, while the PEO is protecting its client’s assets, it is doing the same for itself.
If a PEO ties in a profit sharing component for internal employees, the workforce will be financially rewarded for protecting the company’s and by extension the client’s, bottom-line. When the PEO offers a safety incentive rebate for good loss years, the PEO enlists the help of its clientele to focus on helping this joint effort that will benefit both parties.
Pricing
A PEO that has a high deductible insurance platform most certainly has pricing advantages. Just because a PEO may have a price advantage doesn’t mean it should drop to the floor on its pricing. Too many PEOs have under priced business only to be rendered non-competitive with future pricing as a result of claims implosions. Pricing efficiency should be utilized to drive higher GP and when necessary, afford the PEO the latitude to price correct for low volatility business. With high deductible insurance platforms, pricing advantages occur. The key is to not abuse these advantages for the sake of growth by making poor client selections.
Underwriting
Superior underwriting is a must for a PEO with a high deductible insurance platform. Appropriate client selection is not a luxury in this scenario, it is a requisite. With a large enough book, there will be some larger claims. The key is to make these claims the anomaly, not the rule. Underwriting becomes pivotal when a PEO is assuming a level of risk. A combination of paper underwriting and field underwriting is advised to achieve the best results.
Deductibles
Not only do micro deductibles offer additional cost savings to a PEO’s clientele with pricing, it also pushes some of the risk onto the client. This is beneficial for three reasons:
- The client is afforded a better pricing upfront on the program
- The PEO is able to offload some of its claims risk to its clientele
- The client is more focused on claims mitigation to keep from paying out deductibles
This renewed focus that the client has, when guided by a solid PEO service team, can impact hiring practices, risk management strategies, safety culture and productivity.
Cash Flow
Cash flow is a swinging door with high deductible insurance platforms. When a PEO is on a high deductible program, it is required to remit only a portion of the premium collected (this amount varies based on the parameters of the high deductible program). Moreover, the PEO is required to make collateral deposits based on the size of its book with the backing carrier. The PEO is on the hook for the first dollar of claim up to the internal deductible amount established. If a PEO is poorly run in its underwriting processes and service component, the likelihood of experiencing claims increases which negatively impacts cash flow. However, if a PEO is successful with underwriting and the field service mitigates future risk, this creates a cash flow surplus which can be utilized to grow the PEO.
Channel Partners
A PEO that utilizes channel partners as part of its go-to-market strategy has the ability to pay commissions commensurate with market expectations when having a risk baring insurance platform. A PEO without a risk baring platform will have to pay its referral partners a percentage of admin. If the referral partner is accustomed to higher commissions, the PEO may have to build these commissions into the admin resulting in less competitive pricing to its clientele. The top referral channels command top commission tiers. Therefore, a PEO that has a good service platform and pays higher will get first look at the best prospects available.
Control
A PEO has more control when it has a high deductible insurance platform. More underwriting control, more control over its cash flow and greater control in its channel partner approach. This control comes at a price. The price of protecting the integrity of the PEOs book of business by having solid internal controls in place. It could easily be concluded that internal controls create increased control with one’s PEO. The more efficient a PEO runs, the more control it has over its own destiny.
Conclusion
The PEO model, to a large degree, is about managing risk internally and externally. HR manages HR liability factors. Safety manages safety factors. Health benefits manage workforce health. Workers’ compensation manages potential workplace injuries. PEOs manage regulatory compliance. All of these elements carry a degree of risk and the list goes on.
A PEO that is risk averse, may want to consider becoming an HRO or an ASO. An HRO for example, can drive value to a client with a suite of HR services, tools and consultation without incurring the same risk. The same goes with an ASO. Most HR firms have disclaimers that inform the client their advice given isn’t in lieu of legal advice. The aforementioned statement is a risk offloading strategy. If a company wants to remain in the PEO space, being risk averse can be detrimental. If a PEO is to remain risk averse, it shouldn’t expect tremendous growth. A PEO, to a large extent, is in the business of managing risk. If it is afraid to take on risk itself, what is that telling its clients about its ability or desire to manage risk?
Can a PEO grow without having a high deductible insurance platform? Absolutely. Though accelerated growth is not normally achieved. Plus, the guaranteed cost platform PEO better have a phenomenal staff and service offering. If it has a phenomenal staff and service offering, it may be prepared to incur the liability of a high deductible program. As you will note throughout this article, a high deductible courts a superior service offering to maintain the integrity of the benefits associated with increased risk. In the future, this type of PEO should consider a high deductible platform. None of the large players are on a first dollar guaranteed policy. There are reasons that the larger players operate on a high deductible. Hopefully these reasons were illustrated throughout this article.
Author: Rob Comeau is the CEO of Business Resource Center, Inc. BRCI is a management consulting company that works with PEO companies, investors, investment bankers and private equity firms. For more information on BRCI, please visit them on the web at www.biz-rc.com.
