Workers' compensation is a good example. Most U.S. companies cannot operate without either purchasing workers' comp insurance or becoming qualified self-insurers.

A tightening of the workers comp marketplace may leave a corporation with only two choices: purchase an insured program in which they share financially in the risk or become a qualified self-insurer. Under both of these options, the insured is retaining much of the operational and financial responsibility for worker injuries instead of turning them over to an insurance company.

Its critical that insurance buyers really understand that the first-year costs in these types of programs are just the beginning. The initial fixed costs almost certainly will be accompanied by the need to take an active role in program management.

The insured corporation must participate in claims management. And managers at all levels must be seriously committed to helping employees return to work as quickly as possible. The company as a whole also has to dedicate resources to loss control and injury prevention.

All of these needs require that a certain amount of infrastructure be set up to manage the program. Staff must be dedicated to this and, in some cases, additional resources such as occupational healthcare specialists and claims managers must be put into place.

Its also important to consider that, even when a long-term commitment to ART exists, unexpected situations may develop to cause even more heartburn further into the program.

Collateral will almost certainly be required by the fronting company at the beginning of each and every program year. And the collateral that has been posted in the first years of an ART programwhether in the form of letters of credit, cash escrow accounts or other cash equivalentscontinues to be adjusted annually.

As an example, lets take a company that posts letters of credit to secure future payments on workers' comp claims that have occurred but are not yet paid. Reserves are established as a way to estimate how much these claims will cost into the future.

If claims are more serious than originally anticipated, or if there are more injuries than in previous years, reserves will be higher than expected. The collateral that was posted at the inception of year one may not be sufficient to secure those claims in year two. So, the company not only has to post new collateral at the beginning of the second year, it also must increase the amount of collateral put up for the first year.

Thus, collateral stacks from year to year. Unless claims are well managed and resolved at amounts less than originally estimated, chances are that a lot of a companys credit line can get tied up as insurance collateral instead of being available for money-making purposes.

Of course, collateral may be released if claims are better than expected. But the corporation must accept and understand that under ART programs, the fronting company's call for additional collateral is not all that unusual. And someone who represents the client corporation must keep a careful eye on how the collateral is adjusted.

Another aspect of ART programs to which corporations at times express surprise is their long-tail liability nature. When the corporation shares in the risks, the financial obligations of claims remain with the company until they are satisfactorily resolved.

For example, a retrospectively rated liability or workers compensation programone of the tamest of such programsremains open until all claims are closed or there is mutual agreement between the insured and insurer to close it. An artificial time span is not imposed to relieve the corporation of its financial liabilities. They exist until resolved.

Its not unusual, therefore, for such programs to remain open for 10 or more years, depending on the type of risk and claim particulars. And managing open claims and financial payments for one program after another can be very time consuming and difficult.

There also is the possibility of claims escalating, and financial obligations increasing, at the time of a downsizing, closing, or merger or acquisition. Workers' comp ART programs are especially vulnerable to problems at such times because there almost always is a rash of either new employee injuries or a worsening of existing cases when peoples jobs are in jeopardy.

This in no way implies that these employees are fraudulently claiming injury where none exists. Its a fact of human nature, however, that many good employees will continue to work with minor injuries as long as their job is available.

In the event of a downsizing or divestiture, employees who were on modified duty may be left with no modified job to go to and employees who were working at their regular jobs despite minor employment-related injuries may now file claims.

Corporations would be wise to understand that this may happen and consider purchasing a guaranteed-cost programeven through an assigned risk poolif at all available before embarking in a change in operation that will eliminate jobs. Otherwise they almost certainly will have to bear the brunt of increased costs when they least can afford it.

Looking at ART programs solely as a panacea for current market conditions may seem like a good idea in the short term. But as one senior-level underwriter for ART programs told me years ago, insureds can pay now, or they can pay laterbut they are going to pay. Its only a question of exactly how much and when the payments will be due.

Diana Reitz is the editor of the National Underwriter Company publication “The Tools & Techniques of Risk Management & Insurance” as well as the “Risk Funding” & “Self-Insurance” Bulletins, both available at www.nationalunderwriter.com/nucatalog

Reproduced from National Underwriter Edition, March 10, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.