Master Policy Concept - Data Reporting Challenges

Posted Date: Current

Industry InformationProfessional Employer Organizations (PEO)


For over two decades, Professional Employer Organizations (PEOs), also known as employee leasing companies, have provided small employers with an alternative to the traditional management and administration of the employee workforce. Through an employee leasing arrangement, workers are provided to the PEO’s client(s) for a fee. Without limitation, a PEO may also be referred to as a labor contractor, employee leasing company, lessor, or other similarly administered arrangement.

To address the impact of employee leasing arrangements on workers compensation data collection, policy forms, and experience rating plans, the National Association of Insurance Commissioners (NAIC) adopted model regulations and licensing provisions in 1991. The NAIC model regulations were necessary because PEO policies merged the premium and loss information of new clients with existing clients. This is contrary to the concept of workers compensation experience rating, which measures the losses of a single employer in a state against the losses of other similar employers.

With the 1991 NAIC model regulation, policy and experience rating rules were adopted that would allow on one hand, the need to track client loss experience and coverage, but on the other hand, the market desire for a streamlined system for writing PEO policies. This flexibility essentially allowed for the writing of master policies in the voluntary insurance market and multiple coordinated policies in the residual market.

Whether coverage is provided under a master policy or multiple coordinated policies, the value of the experience rating and proof of coverage programs must be effectively maintained through:

  • Accurate reporting and tracking of individual client experience for rating purposes
  • Tracking of each employer coverage for state industrial commissions

NAIC Model Law Working Group

In 2004, the NAIC established an Employee Leasing Model Law Working Group, whose name was changed in late 2005 to the Professional Employer Organization Model Law Working Group. The objective of the working group is to update the existing model regulations to address public policy concerns related to the coverage and rating of employers involved in employee leasing arrangements. Recently, the working group discussions have been focused on alternatives to the 1991 model regulations and additional issues such as, proof of coverage, fraud, gaps in coverage, etc.

Master Policy Concept

With the Master Policy concept, a single standard policy for the PEO and all of its clients is issued in the name of the PEO. Some of the characteristics of this type of policy are:

  • The PEO is the primary named insured, and each client company is referenced as an additional name
  • For the purpose of proof of coverage, each name and corresponding address of a client company constitutes a separate employer record
  • Aggregated payroll, premium, and losses are reported for the PEO and all of its clients
  • One experience modification is applied to the single policy
  • Some states require the identification and listing of each client company as additional names or by endorsement
  • Some states require that the experience at the client level be maintained and available for experience rating; however, there is only one experience modification produced at the aggregate level for the PEO
  • Some states require that they be notified of new or former clients
  • After a termination of an employee leasing contract, most states require that all client-level experience be reported—this is a manual process using experience rating forms

Master Policy Administration

Many carriers and PEOs prefer to avoid the administrative expense of issuing policies to potentially hundreds of individual client companies. Where a multiple policy approach is not mandated, carriers often issue master policies to PEOs covering all the employees assigned to client companies. 

It is not employee leasing itself that creates the potential efficiency gains from reducing the number of policies issued. Any mechanism that allows carriers to group multiple employers for policy issuance purposes could reap those gains. Employee leasing, however, has attained sufficient business entity status to serve as such a mechanism in states where a master policy approach is permitted.

Overall Challenges

One of the biggest concerns with tracking client companies is that they can often move from one PEO to another, making it extremely difficult to track their loss experience and coverage without separate policies. A master policy approach dissolves the one-to-one link between the policy and the payroll and loss experience of the individual client companies that statistical plans require and computer systems were designed to support. As a result, individual risk experience ratings can no longer be calculated for these businesses using existing automated systems.

Automated experience rating systems and procedures currently in place depend on the issuance of a separate policy to each employer that is to be rated. The existence of a separate policy identifies the employer as a potential candidate for experience rating and results in the submission of unit reports that provide the payroll and losses of the employer used in the experience rating calculation.

Data Reporting Challenges

Under the Master Policy approach, data reporting for experience rating and proof of coverage for each client presents a large challenge for data providers. Most insurers’ reporting systems and processes are set up to track loss experience data and proof of coverage information from separate policies for each employer and not from a single policy providing coverage to numerous employers. Specific data reporting challenges include:

  • Tracking of former or new client companies
  • Commingling of PEO experience with multiple client companies’ data
  • Manual reporting of client-level data for purposes of experience rating only
  • Production and distribution of experience ratings for former client companies
  • Reporting of individual employer records for each client company on the policy
  • Misreporting of names and addresses
  • Untimely reporting of client-level data for former clients and open claims

Broad Solutions for the Master Policy

Concerned that Master Policies could enable individual risks to avoid their experience modification by transferring their employees to a PEO, some states prohibit the Master Policy concept and require issuance of multiple policies. Other states allow Master Policies but attempt to require that individual risk experience be submitted to produce experience modifications when appropriate.

As the NAIC Professional Employer Organization Model Law Working Group continues its efforts to revise the existing model regulations, NCCI is working with the NAIC, data providers, and PEOs to explore data reporting alternatives that could make it possible to experience-rate individual Master Policy client companies. However, any new data reporting requirements would potentially be difficult to implement and costly to carriers, many PEOs and NCCI.

Whichever alternatives are considered, they must take into account the full range of challenges presented by the Master Policy in order for experience rating and proof of coverage programs to be effectively maintained. While the investigation of alternatives is both warranted and timely, ultimately, it may prove that in order to maintain the integrity of these programs, the multiple coordinated policy approach is the simplest and least disruptive solution for all parties.