“One of the challenges in writing insurance for PEOs is that, in the past, a number of insurance companies got burned because they either didn’t understand what they were writing or that the makeup of the businesses served by the PEO had changed and the carrier didn’t know or didn’t respond appropriately,” says Richard G. Turner, executive vice president of Florida-based Patriot Risk Management.

Professional employer organizations (PEOs) are businesses that allow clients to outsource management of human resources, benefits, payroll, tax administration and workers compensation. According to the National Association of Professional Employer Organizations (NAPEO), an industry trade group, PEOs establish and maintain an employer relationship with employees at the client’s worksite and contractually assume certain employer rights, responsibilities and risk.

According to NAPEO, businesses can benefit by using PEOs, because they provide:

• Relief from the burden of employment administration

• A wide range of personnel management solutions through a team of professionals

• Improved employment practices, compliance and risk management, which help reduce liabilities

• Access to comprehensive employee benefits, allowing clients to be competitive in the labor market

• Help improving productivity and profitability

Patriot Risk Management is a managing general underwriter that owns its own insurance company. “Our carrier, Guarantee Insurance Company, is licensed in about two dozen states,” Turner explains, “and we also write for ULLICO, a B+ carrier licensed in 48 states.” The firm offers workers compensation coverage for more than 75 PEOs generating more than $70 million in premium.

The firm was founded by Steve Mariano, who created and operated what Turner calls a very successful PEO, Strategic Outsourcing, which grew and was eventually purchased by Regents Bank. “Steve understands the PEO business and we have been able to grow and succeed, in large part, because of his experience and expertise,” Turner says.

A key element of the firm’s success is the structure of the programs. “We believe in risk-sharing programs with the PEOs. To accomplish this we use captives and large deductibles program structures to make sure that the PEOs have ‘skin in the game.’ It’s also important for agents and carriers to stay in constant contact with PEO clients,” he explains. “This helps guarantee that the program—in particular, the workers comp insur­ance—is meeting the insured’s needs and that there are no surprises.”

Such surprises come about when, as Turner mentioned earlier, the PEO complexion changes. “It’s easy to get burned, for instance, if a PEO that was initially serving a group of retail stores expands to include a book of roofers. The risks—and the potential for loss—are quite different.”

Because of the integral role workers compensation insurance plays in a PEO account, additional challenges track those commonly associated with the product itself. Claims handling tops the list.

According to Turner, Patriot’s claims approach helps address this and is key in keeping the client’s costs down, since the product is often written on a cost-plus basis using a captive or large deductible structure. “Claims handling is critical,” he says. “That’s why, for all of the programs we write, we handle the claims internally.”

In addition to using dedicated staff that understands PEO workers comp issues, the company avoids the linear approach to claims handling, where nothing happens until an adjuster receives a claim, reviews it, decides to initiate action such as bringing in nurse case managers, fraud investigators or subrogation—all of which loses valuable time. Instead, the company uses what it calls “the claims swarm.”

“We have the first notice of loss reviewed by five department man­agers—nurse case management, fraud/special investigation, subrogation, legal, and claims,” he explains. “They all see it right away, and can immediately determine if a claim looks suspicious or needs special attention, so we can address that immediately.” Turner stresses the importance of this, given jurisdictional regulations that establish time frames for carriers seeking to deny a claim due to fraud.

“The process works just as well for legitimate claims,” he continues. “For instance, if a serious injury occurs, an in-house nurse who can assess the situation quickly allows us to affect the protocols and help the employee get the treatment he needs. If you wait too long, the employee has already selected a path. All you can do then is monitor…and hope for the best.”

The approach has paid significant dividends, with workers comp loss ratios over the last four years about 10 points better than those published by the National Council on Compensation Insurance, he says. “It’s had a noticeably good effect in terms of reducing claims from what a typical carrier might experience,” he explains, “and it’s been one of the reasons for our growth and why we tend to attract more clients. They realize the net savings on claims can go into their pockets as profits.”

The PEO market is feeling some of the same economic effects as other businesses. “Particularly where there’s a focus on the construction industry, PEOs have seen payrolls drop and, because their compensation is tied to payrolls, their revenue is down,” he explains.

At the same time, the tough economy has delivered benefits to PEOs. “It used to be that many companies were reluctant to consider using PEOs,” he explains. “It just wasn’t in their DNA. However, we’ve heard from some clients lately that a number of smaller organizations, as they looked at how they do business, have started exploring the idea. They realize that, in a tough economy, they need to look at economies that PEOs can deliver.”

According to Turner, oppor­tunities exist for agents and brokers to consider how PEOs may fit into their future. “A number of PEOs have actually teamed up with agents,” he explains. “Their distribution channel includes independent insurance agents.”

In some cases, agencies or brokerages actually own PEOs. “When they’re prospecting and writing business, the PEO is an attractive alternative to simply selling insurance,” Turner notes. “It depends upon the agency, its philosophy, its structure and its expertise. A lot of independent agents have substantial knowledge and are involved with PEOs already.”

Of course, insuring PEOs is another option for retail agents and brokers. “We’re interested in working with agents to see if and how we can put together programs,” Turner says. “It’s important for agents to consider how a PEO could fit into their market strategy. A PEO can be a great aggregator of small workers compensation accounts and a good way to service clients on a number of fronts.”

If agents don’t understand the market well enough to get involved or seriously consider it, a number of resources exist. “NAPEO is, of course, one source of expert information,” Turner notes. “Their Web site, www.napeo.org, provides a wealth of information. The organization itself offers a range of publications and hosts networking and educational opportunities for those who are interested.”

Turner encourages retail agents and brokers to understand fully a potential carrier or program administrator partner’s philosophy, practices and experience when considering if and how to enter the business. “The quality of people you’re working with, the underwriting guidelines and controls, and the underwriter’s track record and commitment are all important,” he explains.

“In some ways, the business has been stigmatized because of bad experiences certain carriers have had,” he adds. “That doesn’t mean there aren’t good opportunities. An agent who knows about and understands PEOs is well equipped; it’s just another arrow in the quiver that can help them connect with prospective clients.”

For more information:
Patriot Risk Management, Inc.
Web site: www.prmigroup.com