Note 3 – Workers’ Compensation Claims

The following table summarizes the aggregate workers’ compensation reserve activity (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Beginning balance
Workers' compensation claims liabilities	$	390,814		$	330,079		$	363,517		$	312,537
Add: claims expense accrual
Current period		37,784			39,316			116,803			112,469
Prior periods		(2,327	)		(280	)		(2,333	)		4,984
		35,457			39,036			114,470			117,453
Less: claim payments related to
Current period		7,502			6,082			13,783			11,362
Prior periods		19,905			18,466			65,296			67,928
		27,407			24,548			79,079			79,290

Add: Change in claims incurred in excess of retention limits		(26	)		118			(70	)		(6,015	)

Ending balance
Workers' compensation claims liabilities	$	398,838		$	344,685		$	398,838		$	344,685
Incurred but not reported (IBNR)	$	246,174		$	177,166		$	246,174		$	177,166

Ratio of IBNR to workers' compensation claims liabilities		62	%		51	%		62	%		51	%

The Company is a self-insured employer with respect to workers' compensation coverage for all of its employees (including employees co-employed through our client service agreements) working in Colorado, Maryland and Oregon, except as described below. In the state of Washington, state law allows only the Company's staffing services and internal management employees to be covered under the Company's self-insured workers' compensation program. The Company also operates a wholly owned, fully licensed insurance company, Ecole, which provides workers’ compensation coverage to the Company’s employees working in Arizona, Utah and Nevada. The Company maintains additional reinsurance coverage for Ecole with Chubb Limited (“Chubb”), for losses above $5.0 million per occurrence.

The Company obtains policies from Chubb for all California-based clients along with clients in Delaware, Virginia, Pennsylvania, North Carolina, New Jersey, West Virginia, Idaho and the District of Columbia. The arrangement with Chubb, known as a fronted program, provides BBSI a licensed, admitted insurance carrier to issue policies on behalf of BBSI. The risk of loss up to the first $5.0 million per occurrence is retained by BBSI through various agreements. Chubb assumes credit risk should BBSI be unable to satisfy its indemnification obligations.

As part of its fronted workers’ compensation insurance program with Chubb, the Company makes monthly payments into trust accounts (the “Chubb trust accounts”) to be used for the payment of future claims. The balance in the Chubb trust accounts was $430.0 million and $380.6 million at September 30, 2018 and December 31, 2017, respectively. The Chubb trust accounts’ balances are included as a component of the current and long-term restricted cash and investments on the Company’s condensed consolidated balance sheets.

The Company restructured its fronted program with Chubb effective July 1, 2018. The new agreement maintains retention levels of $5.0 million per occurrence but now requires that collateral be advanced at the inception of the policy term. To partially satisfy these additional collateral requirements, the Company provided a surety bond of $30.0 million and a letter of credit of $63.7 million from its principal bank, Wells Fargo Bank, National Association (the “Bank”).

The states of California, Maryland, Oregon, Washington, Colorado and Delaware required us to maintain specified investment balances or other financial instruments totaling $85.2 million and $96.8 million at September 30, 2018 and December 31, 2017, respectively, to cover potential workers’ compensation claims losses related to the Company’s current and former status as a self-insured employer. At September 30, 2018, the Company provided surety bonds and standby letters of credit totaling $85.2 million, including a California requirement of $70.6 million.

The Company provided a total of $398.8 million and $363.5 million at September 30, 2018 and December 31, 2017, respectively, as an estimated future liability for unsettled workers' compensation claims liabilities. Of this amount, $2.9 million and $3.0 million at September 30, 2018 and December 31, 2017, respectively, represent case reserves incurred in excess of the Company’s retention. The accrual for costs incurred in excess of retention limits is offset by a receivable from excess insurance carriers of $2.9 million and $3.0 million at September 30, 2018 and December 31, 2017, respectively, included in other assets on the condensed consolidated balance sheets.