A Look At Self-Insurance for Workers Compensation
At Caitlin-Morgan, we specialize in providing Workers Compensation solutions – from traditional guaranteed programs to alternatives that include large-deductible plans, captives and self-insurance. For some organizations, self-insuring their Workers Compensation program makes sense.
Self-insurance is typically defined to describe a wide variety of risk-financing arrangements through which organizations pay all or a significant portion of the costs of their own losses. The more common self-insurance plan, qualified self-insurance, is a well-defined program in which a company chooses to pay its own losses up to a specified amount. Most self-insured organizations will purchase excess insurance to limit their exposure to unacceptable levels of losses. In the case of Workers Compensation, this would mean purchasing Excess Workers Compensation coverage.
Organizations must submit an application and comply with established state rules and regulations to achieve and maintain self-insured status; these rules, of course, vary depending on the state. Firms must also put together a completely customized cost management program, and retain control of their loss reserve dollars until payments are actually made.
There are certain lines of coverage that lend themselves to self-insurance. This includes coverage lines characterized by high frequency and low severity of claims, as the volume of claims tends to be relatively predictable and excess insurance can be purchased to address any potentially severe or catastrophic cases. Also, coverage lines characterized by an extended payout schedule are suited for self-insurance, as the self-insuring firm retains control of the loss reserves until claims are actually paid and has the opportunity to invest those funds.
Workers Compensation fits the bill on both counts. First, it is a relatively stable line of coverage as it relates to predictability of losses and the nature of losses. Second, industry data indicate that typically only 25% of estimated ultimate losses are paid out within the first twelve months of the policy year. Such payout estimates apply to aggregate data as opposed to individual claims. Also, Workers Compensation benefits are determined and limited by state statutes. Litigation is less likely to impact Workers Compensation than some liability lines of coverage. As a result, Workers Compensation costs are generally more predictable, making the coverage a good candidate for self-insurance.
Benefits of Self-Insurance
A successful self-insurance plan can provide organizations with greater control over expected losses and related program expenses, insurance market cycles resulting in fluctuations in pricing and coverage availability; and the overall delivery of risk management services. Self-insurance can also improve a company’s cash flow position as there is no pre-funding of losses required like many traditional insurance plans. Moreover, under a self-insured program, an organization can implement a completely customized service package. While essentially the same services provided under a commercially insured plan must be applied to a self-insurance plan, self-insurers have the flexibility to select firms that have specialized expertise and experience specific to their industries. They can target resources at the areas likely to generate the greatest return on investment and have the biggest impact on cost savings.
There are, however, things to consider with self-insurance plans as well. There are increased administrative responsibilities and the possibility of a spike in losses due to an aggregation of losses in the policy year, which can be insulated against with Excess coverage, but this is an additional cost. Also, self-insurance involves a long-term commitment on the part of an organization. Abandoning the program procedures and systems can be expensive, and the return on investment to develop the systems will be diminished or lost entirely. There may also be tax implications, as a self-insurer may only take a tax deduction for paid losses and paid expenses. Loss reserves are not tax deductible until losses are paid.
We can help you assist your clients in determining whether self-insurance is a viable option when it comes to their Workers Compensation program. Our experience and expertise in unparalleled in this area. Give Caitlin-Morgan a call at 877.226.1027 to discuss the solutions we can provide.