When Self-Insuring Workers’ Compensation Makes Sense
In self-insuring a Workers’ Compensation plan, an employer assumes the financial risk for providing on-the-job benefits to its employees when a workplace injury or illness occurs. In essence, self-insured employers pay the cost of each claim “out of pocket” as they are incurred instead of paying a fixed premium to an insurance carrier or to a state-sponsored Workers’ Compensation fund. Today, there are an estimated 6,000-plus corporations and their subsidiaries nationwide that operate self-insured Workers’ Compensation programs. In addition, many other employers participate in group self-insured Workers’ Compensation funds, where they pool together with other companies to self-insure their collective Workers’ Compensation risks.
Employers typically opt to self-insure a Workers’ Compensation plan because it provides them with more opportunities to control and lower fixed costs and ensure their injured workers are receiving timely and proper care. They have control over claims administration and safety and loss control efforts, which in turn enables employers to better mitigate and prevent losses. Under a self-insured arrangement, employers also pay claims as they are incurred, in lieu of paying costs up front as they would with a commercial insurance plan or a state-fund policy. This “pay-as-you-go” approach serves to maximize the operational cash flow for employers.
Self-funded Workers’ Compensation insurance plans, however, are not for all employers. An employer with a self-insurance plan assumes the risk for paying employee Workers’ Compensation claim costs, therefore it must have the financial resources (cash flow) to meet this obligation, which can be unpredictable. An employer also must make certain state bond requirements. Small employers and other employers with poor cash flow may find that self-insurance is indeed not a viable option. (There are, however, smaller companies that do maintain viable self-insured Workers’ Compensation programs.)
To manage unexpected large catastrophic claims, most self-insured employers purchase excess insurance to reimburse them for claims above a specified dollar level. In fact, all states allow (and most require) self-insureds to purchase specific excess insurance coverage. This limits the amount a self-insured pays for claims from any one occurrence. The amount the self-insured is responsible for is called the Self-Insured Retention, or SIR. Specific excess insurance reimburses the self-insured when a claim or claims resulting from one occurrence exceed the SIR.
Self-insurance plans can either administer claims in-house, or subcontract this service to a third party administrator (TPA). TPAs specialize in providing claims administration and loss control services for self-insureds. They can also help employers coordinate provider network contracts and utilization review services.
Employers considering self-insuring their Workers’ Comp program are those that:
- Have good claims experience and feel their premium is higher than it should be.
- Believe their claims aren’t being well managed and want to be more involved in the claims process.
- See the substantial amount of money they could be holding (instead of their insurance carrier) that isn’t immediately needed to pay claims.
- Realize that by self-insuring, they not only have the use of money not yet needed for claims, but also actually keep what isn’t needed at all.
- Want to take a more proactive approach to managing the risk and having greater control over loss prevention.
Caitlin Morgan can help guide you and your clients through the complex process of analyzing, evaluating, and establishing a successful self-insurance Workers’ Compensation program. For more information, contact us at 877.226.1027.