Properly Managed Risks
Properly staffed and managed PEOs have the ability to aggregate and manage client company employment-related risks more efficiently and effectively than their small business clients are able to do on their own. For example:
- Most small businesses do not have the professional expertise needed to properly manage various employment law risks. Most PEOs have in-house HR experts and access to experienced employment law attorneys. By providing these services to their small business clients, a PEO can significantly improve these employment risks for their clients. And many PEOs provide employment practices liability insurance that their clients otherwise would not have.
- Most small businesses do not have adequate workers' compensation ("WC") risk management capability in-house, and most WC insurance companies do not provide significant onsite risk management assistance to smaller clients. Some PEOs have specialized in filling this need and have developed significant in-house capability, including having their WC risk management services certified by the Workers' Comp Risk Management Certification program.
To help cover the cost of these risk management services, some PEOs establish a financial arrangement with their insurance carriers to share part of the risk and rewards through a "large deductible" or "retroactively rated" insurance policy. For a well-managed PEO, this type of arrangement can help reduce the PEO's cost of services. Such financial arrangements have zero risk to the PEO's client employees if the risk is fully insured by a licensed insurance carrier. However, it is very important that any PEO establishing a loss sensitive insurance plan have sufficient in-house expertise to successfully manage the risks and to maintain adequate financial reserves for unpaid claims based on sound actuarial estimates of the ultimate claim liability.