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As employers continue to search for ways to reduce expenses, many are considering alternative methods of funding their workers' compensation programs. Self-insurance is one option to control costs, but it can also be more expensive than traditional placement methods if not managed correctly.

Going self-insured is a daunting task, and there are advantages and disadvantages to weigh before making the decision to become self-insured. Some jurisdictions limit self-insurance to employers who have a premium above a specific value (usually somewhere between $500,000 and $1 million). Although self-insurance is not feasible for all small businesses, it is possible to tailor a program to fit the company and its workforce.

FINANCIAL CONSIDERATIONS

First, an employer must look at their company's financial state and decide whether or not they could sustain a large loss or frequent sizable losses. If they are financially able, then they must consider the volume of claims and their claims history. Does the company have enough professional claims staff to effectively handle claims? Should they hire a third-party administrator (TPA)?

Self-insuring shifts the financial risk and administrative headaches from the insurer to the employer. Self-funding can be complicated, and accessing the services of a TPA is a common decision. (Access Mark's previous articles on choosing a TPA here).

An employer will need to determine the costs involved in switching to a self-insured plan. Establishing tighter administration controls and procedures are time consuming, and savings may be spent on fees charged by TPAs and various other vendors secured to assist in administering the program.

An employer will need to carefully review its claims history to help predict the cost and volume of future claims. Its actuary and broker can assist in the evaluation of past exposure to determine feasibility of self-insurance. If an employer does not have five or more years worth of data, however, they probably should hold off on self-insurance.

ADDITIONAL WORK

Self-insurance is more work than simply paying a premium. When self-insured, an employer's claims management philosophy needs to be strong and aggressive in order to be effective, and must include pre- and post-loss claim management techniques to reduce exposure. Commitment for the long haul is necessary to achieve significant savings.

So if the company decides to self-insure, their focus must also be on loss prevention. Having the ability to prevent large claims before they occur is crucial to a workers' compensation program--self-funded or not.

What type of training and wellness programs are in place? Have recording procedures for accidents been created? Are supervisors aware of safety processes?

As discussed above, willingness to commit resources and develop processes for effective loss control and claim management is essential to a company contemplating self insurance.

Companies should also consider hiring an employee health nurse or a safety officer to oversee the programs. When self-insurance is contemplated, those safety/health/claims services provided by your insurer in a bundled program must be hired or outsourced.

With a self-insurance plan, stop-loss insurance becomes essential because it protects against catastrophic claims. But insurers will want to see both claims history and loss-control policies and procedures before committing to underwriting a company. Bad experience and/or ineffective loss-control programs can dramatically increase the costs of these insurance programs.

THE PERKS

Still, when set up properly, self-insurance programs provide an added flexibility and control over management of claims and expenses. The employer retains control over the banking arrangements and the contracts with vendors, allowing them to directly manage their costs.

An employer will see a savings in administrative costs, a significant part of the insurer's premium dollar (though if the employer doesn't already have resources for safety and claims management support and has to hire vendors or ad staff, the savings will not be as significant). Some state mandates and state premium taxes may be reduced or avoided as well. Loss-adjustment expenses may also be reduced through tighter controls.

The bottom line is, self-insurance for workers' comp is a viable option for small businesses, but should be used only after careful study. A poorly designed or executed self-insurance plan, including potential medical network disruption, may cause employee resentment and can alter employee recruitment and retention.

Editor's note: In part two of this series, Mark shares more information on self-insurance and covers additional alternative risk-financing options. Read it here.

MARK NOONAN is a managing principal and the senior knowledge manager for workers' compensation for the Casualty Practice within Integro Insurance Brokers.

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April 1, 2010

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