September 16th, 2026 | By Sheldon Altschuler, Area Vice President, PEO
 

Cash Flow Isn't the Whole Story

In our last blog, we left every PEO with a question: What has been your total cost of risk?

In year one, a large deductible (LD) program looks great. Fixed insurance costs run lower. Losses haven't fully developed. Collateral feels manageable. You're likely collecting workers comp charges from clients faster than you're funding deductible reimbursements, and your sales team has pricing room to work with.

That creates real cash-flow value. But cash flow isn't profit, and an early snapshot isn't the program's ultimate cost. Total cost of risk is never just premium paid plus claims paid in the fiscal year.

A More Complete Calculation 

Here's the fuller picture:

Fixed insurance costs + ultimate retained losses + claims and program expenses + collateral and financing costs + internal operating costs + unrecoverable client-level costs = total cost of risk.

Each line item is a real, calculable contributor:

• Fixed insurance costs: deductible premium, excess coverage, state assessments, taxes, loss-conversion factors, claims administration charges, and other program fees.
• Retained losses: the estimated ultimate value of claims, not just what's booked today. That means reserves plus incurred-but-not-reported losses and realistic development on open claims, including ever-changing statutory factors.
• Internal infrastructure: actuarial reviews, financial reporting, claims oversight, safety resources, data management, legal support, and executive attention. None of it shows up on the loss run, and it compounds year over year.
• Collateral: letters of credit carry fees. Cash collateral can't be invested elsewhere. Credit tied to an insurance program can't fund an acquisition, technology, or another strategic move, even if you eventually get some back.

Bureau and State Rate Advisories Complicate the Comparison

Workers comp rates don't stand still. That matters most when some markets are declining, along with PEO premium basis, while other jurisdictions climb.

NCCI and independent state rating bureaus regularly evaluate workers compensation experience and file changes to advisory loss costs, advisory rates or pure premium rates. These changes reflect claim frequency, severity, medical costs, wage trends and other jurisdiction-specific conditions.

NCCI reported a 91% calendar-year combined ratio for 2025, but a 102% accident-year combined ratio. The gap tells the story: favorable development from older years can prop up today's result even while the newest accident year looks weaker.

California is another reminder that conditions turn. Effective September 1, 2026, the state approved advisory pure premium rates averaging $1.65 per $100 of payroll, a 6.6% increase over the prior approved level.

An LD analysis built on yesterday's rate environment may not properly price tomorrow's retained losses or renewal costs.

Statutory Risk Is Retained Risk

Ask what's changed in your jurisdictions since your original deductible economics were set. Benefits, medical fee schedules, presumptions, compensability standards, and court interpretations can all shift. A broader compensability definition or new benefit requirement can raise the value of claims that already happened, or the expected cost of future ones.

That makes statutory risk a real cost. A thoughtful LD analysis should stress-test ultimate losses for:

• Medical inflation
• Wage and indemnity benefit increases
• Broader compensability standards
• New occupational disease or presumption laws
• Adverse court decisions
• Changes in claim duration
• Deterioration in client or industry mix

The Better Question

Is your developed loss ratio under 30%, and firmly positioned to stay there? If so, a large deductible just might work. With enough capital, stable exposures, jurisdictional awareness, disciplined underwriting, strong claims management, and reliable data, it can create real economic value.

But here's the better question: Have you absorbed every claim, expense, collateral impact, and legal or rate change into your calculus? And ultimately, did you retain risk more efficiently than you could have transferred it?

We know workers comp claims take years to develop. The obligation to measure it, book it, and evaluate adequacy should begin on day one.

--

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.