Why does the premium discount plan for workers compensation insurance provide an increasing credit for premiums?

The premium discount plan for workers' compensation insurance is designed to reward insured businesses with a larger credit as their premiums increase. This structure is based on the principle that while certain operational costs related to providing coverage do not rise in tandem with the premiums, higher premium amounts often reflect larger payrolls or increased business activity, which can lead to a higher likelihood of claims.

In essence, many costs associated with administering the insurance policies, such as claims management and processing, often do not escalate proportionately with increases in premium income. Instead, they remain relatively stable regardless of the premium amount. Hence, the insurance company can afford to offer larger discounts on higher premiums, which incentivizes businesses to maintain coverage even if their premium amounts rise significantly. This scheme promotes long-term relationships between the insurer and insured while also ensuring that businesses are not deterred from growth due to escalating insurance costs.

Understanding this principle is crucial for insurance agents and brokers as they communicate the benefits of these plans to their clients, helping them appreciate the financial advantages of maintaining and increasing their policy limits.