Predictability vs. Guessing: Why the Law of Large Numbers Matters in Insurance Decisions

When employers consider changing workers’ compensation insurance structures, the conversation often jumps straight to options: retro plans, captives, high deductibles, or self-insurance. What’s usually missing is a far more important discussion—whether the organization is predictable enough to handle more risk in the first place.

This is where the law of large numbers becomes critical. Insurance structure decisions are not about optimism or confidence. They are about data, discipline, and predictability.

What Predictability Actually Means

Predictability does not mean having no claims. Every organization has injuries. Predictability means understanding the patterns behind those injuries well enough to make reliable projections.

The law of large numbers tells us that as the volume of data increases, outcomes become more stable and easier to forecast. Insurance companies rely on this principle every day when they price risk. Employers must do the same before retaining it.

Predictability comes from consistency:

• Stable claim frequency over time

• Similar injury types and severities

• Reliable medical outcomes

• Disciplined return-to-work execution

Without these elements, loss projections are guesses—not forecasts.

Guessing Is More Common Than Employers Realize

Many organizations believe they are predictable because they’ve had a few good years. Claims feel manageable. Nothing catastrophic has happened recently. Leadership feels comfortable.

That comfort is often misleading.

A small number of claims, a short loss history, or inconsistent injury management creates volatility that isn’t immediately visible. One bad claim can distort results. One litigation-driven case can erase years of perceived stability.

That’s guessing disguised as confidence.

Why Predictability Is the Gatekeeper to Risk

Insurance structure does not fix unpredictability—it magnifies it.

When an employer moves into a structure that retains more risk, volatility shows up faster and more directly:

• Losses affect cash flow immediately

• Poor claim decisions become financial events

• Delayed return-to-work increases retained costs

Organizations with predictable losses can absorb this volatility because it’s expected and manageable. Organizations without predictability experience surprises—and surprises are expensive.

This is why predictability must be assessed before structure decisions are made.

The Role of Workers’ Comp Management Systems

Predictability is not accidental. It is built through systems.

Strong injury response, medical coordination, communication, and return-to-work programs reduce variability. They create repeatable outcomes. Over time, those repeatable outcomes produce reliable data.

This is why the transcript makes a critical point:
No insurance structure can fix poor workers’ comp management.

If injuries are reported late, medical care is uncontrolled, litigation escalates, or return-to-work is inconsistent, changing insurance structure will not solve the problem. In higher-risk structures, it will expose it.

Assessment Before Action

Before an employer considers retaining more risk, several diagnostic questions must be answered:

• Are loss trends stable over multiple years?

• Are claim severities controlled or escalating?

• Are reserves predictable, or do they fluctuate wildly?

• Do return-to-work outcomes follow a pattern—or vary by supervisor and location?

These are audit questions, not market questions. They require analysis, not quotes.

Predictability Unlocks Strategic Options

When predictability is present, options expand:

• Deductibles can be sized intelligently

• Captives become manageable instead of intimidating

• Retros provide upside without chaos

• Financial forecasting becomes reliable

Predictability transforms insurance from a cost into a strategic lever.

Without it, even the most sophisticated structure becomes a liability.

The Strategic Takeaway

The smartest insurance decisions begin with humility, not ambition.

Before asking “Which structure should we choose?” employers must ask:

• Do we actually understand our loss behavior?

• Are our outcomes consistent—or just familiar?

• Have we earned the right to retain more risk?

The law of large numbers rewards discipline and punishes guessing. Employers who respect that reality make smarter decisions, avoid unnecessary volatility, and position themselves for long-term success.

Insurance structure is powerful—but only when predictability comes first.

Michael Stack, CEO of Amaxx LLC, is an expert in workers’ compensation cost containment systems and provides education, training, and consulting to help employers reduce their workers’ compensation costs by 20% to 50%. He is co-author of the #1 selling comprehensive training guide “Your Ultimate Guide to Mastering Workers’ Comp Costs: Reduce Costs 20% to 50%.” Stack is the creator of Injury Management Results (IMR) software and founder of Amaxx Workers’ Comp Training Center. WC Mastery Training teaching injury management best practices such as return to work, communication, claims best practices, medical management, and working with vendors. IMR software simplifies the implementation of these best practices for employers and ties results to a Critical Metrics Dashboard.

Contact: mstack@reduceyourworkerscomp.com.

Workers’ Comp Roundup Blog: http://blog.reduceyourworkerscomp.com/

Injury Management Results (IMR) Software: https://imrsoftware.com/

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