Guaranteed Cost or Large Deductible?

August 10th, 2026 | By Sheldon Altschuler, Area Vice President, PEO
 

Is a Large Deductible Program Right for Your PEO?

There is a view within the PEO space that a large deductible (LD) program is evidence that a PEO has arrived. It's a compelling argument: retain more risk, pay less fixed premium, control claims, keep the underwriting profit, and attract new business in the process.

The Hidden Dangers of Large Deductible Structures 

It sounds great. But beneath that promise is a more uncomfortable truth: LDs can put a PEO in the insurance business without the capital, diversification, regulatory protections, or actuarial discipline of an insurance company. Beating the tail is not a strategy. Padding rates or admin fees is not a strategy. Managing claims to closure and promoting workplace safety are important, but neither is a safety net.

Why PEO Client Volatility Amplifies Large Deductible Risk

We all know that in the PEO space, clients can enter and leave quickly. Payroll can expand or contract. Industry mix and classifications can change within a policy year. Yet the claims generated by yesterday's clients often remain with the PEO long after those clients, and their revenue, are gone.

What the NAIC's Workers Compensation Large Deductible Study Found

It's not just my opinion. While somewhat dated, the NAIC's 2016 Workers Compensation Large Deductible Study remains highly relevant. The study highlighted many of the same risks PEOs face today. It noted that workers compensation is a long-tail line and warned that organizations benefiting from current cash flow under LD structures may not maintain sufficient surplus for losses that emerge years later. It also documented situations where both PEOs and carriers failed to adequately prepare for large, long-developing claims.

Collateral Gaps and the Risk of Insolvency

The NAIC further observed that PEO books can grow, shrink, or change rapidly, requiring collateral to be continually reassessed. Client-level data, classifications, and payroll exposures are not always current. Financial, employee, and client audits can lag. In several insurer insolvencies, inadequate collateral was identified as a contributing factor.

In four insolvency examples reviewed by the NAIC, collateral issues included commingling, competing claims, and insufficient security. In two cases, available collateral reportedly covered only about one-third of ultimate paid claims and reserves.

Can PEOs Truly Measure Their Retained Risk?

Are those extreme examples? Maybe. But they are also realities within our industry. Calculating the true cost of risk is difficult and subject not only to internal discipline but also to external forces, including statutory changes and evolving compensability standards. In such a fluid environment, can a PEO be fully comfortable with its retained risk? Are PEOs operating under LD programs comfortable with current signals around rate adequacy and court rulings?  Are impactful trends in California, New York or Nevada being considered? Is NCCI's reported 102% accident-year combined ratio factored into pricing logic?

I'll leave you with one question, and I hope every PEO operating under a LD program can answer it: What has been your total cost of risk?

More on that next time.

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About the Author: 

Sheldon Altschuler, Area Vice President, PEO, Key Risk

With over 30 years of experience in the PEO workers compensation space, Sheldon has helped build and lead programs through decades of industry change. In his role as Area Vice President at Key Risk, he partners with PEOs to turn workers compensation programs into drivers of long-term organizational growth and stability.

Reach out to me directly, [email protected]. I am always open to discussing these strategies and consulting with PEO executives who want to build a more resilient, profitable business.