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Managing workers' compensation exposure continues to be a complex and difficult issue businesses must face today. Overcoming the challenge becomes critical as employers experience a persistent increase in costs. As a result, many companies have been turning to self-insurance as one way to help gain control over their workers' compensation programs and lower expenses. In the first part of this column on self-insurance, I covered the advantages and disadvantages of self-insurance, including for smaller employers.

One additional benefit of alternative risk transfer is that employees may be more inclined to work together with their employer and physicians to establish cost-effective treatment plans if the employer communicates the reasons why it is self-insuring workers' comp and how it will potentially benefit the future of the company.

To achieve these ends, employers are not limited to self-insurance. The following are also alternative risk financing plays:

RETROSPECTIVE RATING PLANS

Incurred-loss and paid-loss retrospective rating plans are two alternative risk financing programs that can be used to lower costs--if properly executed and managed.

All workers' compensation programs are, in truth, loss sensitive. The variable is whether the actual losses impact the cost of the programs for the current policy year or only in future years. Outside of fixed costs paid for program administration and risk transfer for losses that exceed the retention limit, companies pay based on actual loss experience in retrospective rating plans.

When losses are kept low, the net cost of the program is lower than a standard program. The flip side of this, however, obviously is that losses can also exceed what would have been paid under a regular program. Cash flow, collateral requirements and the amount of risk a company is willing to assume must be weighed. As with all loss-sensitive programs, both pre- and post-loss services can impact actual costs on an immediate basis.

LARGE DEDUCTIBLE PLANS

Along with self-insurance programs, large-deductible plans for workers' compensation have become increasingly popular. The plans vary, but overall they allow a company to elect to play all claims up to an agreed amount. At the per-claim cap, the carrier takes over. Having an aggregate stop point in the plan will save a company from catastrophic losses.

The advantage to this funding option is that it provides most of the benefits of self-insurance. The insured benefits from favorable loss experience while also having control over loss-reserve funds. In deductible plans, the disadvantage comes from the chance that the collateral requirement for loss reserves could continue and pyramid over several policy years until all claims are closed if claims remain open for a long time.

Although smaller to midsize companies can usually qualify, these plans are not available in every state.

SELF-INSURANCE GROUPS

As covered in the first part of this column, self-insurance is a system that gives a company the maximum control of their entire workers' compensation program. The most obvious advantage for a company to self-insure is lower premiums and improved cash flow. Additional costs of services that are usually handled by a carrier (i.e., hiring a third-party administrator (TPA) to manage claims) lessen the savings. Possible deferral of tax benefits and collateral requirements must also be considered in calculating the cost-benefit of a self-insured program. Keep in mind, too, that self-insurance becomes problematic for multistate exposures; a company must qualify and be approved for self-insurance in every state they are located in.

A self-insurance group (SIG) is another option for small to midsize companies that do not qualify for individual self-insurance and are not able to secure a large-deductible insurance plan. The loss-control program for a SIG can be tailored to its industry. If the SIG has a good loss experience, future dividends can be paid back to members.

However, groups with weak loss control or groups that are poorly administered can end up costing a member more than traditional insurance.

THE BOTTOM LINE

Choose the best fit for your company. Weigh the advantages and disadvantages for each risk financing option. Research how your state regulates and taxes each program. Decide how your claims are going to be managed--internally or through a TPA? And realize that, no matter what program is chosen, a company will benefit first and foremost by implementing an organized loss-control program. Reduced losses will lower workers' compensation costs--whether self-insured or under another alternate risk financing program.

(Editor's note: Click here to read the first part of Mark's column on self-insurance.)

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

Read more at the WORKERSCOMP Forum^TM homepage.

May 6, 2010

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