Report outlines effective strategies for successful self-insurance groups
A study of SIGs by an International Association of Industrial Accident Boards and Commissions task force has revealed several themes associated with successful groups. The findings and recommendations for best practices are outlined in a new IAIABC white paper.
SIGs are described as a hybrid risk financing mechanism between an employer retaining all or most of the risk of loss from claims and one purchasing first dollar insurance from a commercial insurer. There are 39 jurisdictions that allow SIGs.
"A common denominator in these [recent] failures is that regulators and members were caught by surprise by the failures and the size of the unfunded benefit obligations. As expected, the governors, legislatures and the public demanded to know who was to blame," the paper says. "To be fair, lack of due diligence by all involved was to blame."
Those joining SIGs did so because they were inexpensive "but did not investigate what they were getting into," according to the report. "But the group members that got burned cried out against the state: 'We thought this was legitimate insurance and the state regulated it to make sure it was safe.' Recriminations got worse when the letters arrived from the state charging employers to pay for the unfunded claims cost from their former SIG."
To prevent SIG insolvencies, the paper suggests minimum standards and practices for the regulation of group self-insurance. The recommendations are included in the categories of those that deal with general organization, security requirements, and governance; those that deal with operations of the group plan; and those that direct activities of the regulatory staff.
Among the governance recommendations are:
- Controls on administrative management. Poor management is a factor in nearly all SIG insolvencies, according to the paper. "A central responsibility of management is to be alert to risk and to employ financial risk management practices to avert a large, unanticipated negative net worth." The paper outlines basic requirements to ensure adequate management.
- Engagement by the board. Experts interviewed by the task force agreed that an SIG's board should be in the exclusive control of active members of the group and the board must be fully engaged in establishing policy, monitoring performance, and enforcement of policy and procedures.
- Disclosure. A variety of disclosure vehicles for new members is recommended. "Disclosure means making sure that SIG applicants fully understand the nature of the assessment risk they face from deficits in the group caused by defaults of other members or other causes," the paper explains. "Disclosure will also ease the criticism of regulators and state policymakers who might otherwise be assailed by employers 'surprised' by assessments to fix funding deficits in the SIG they belong to."
Recommendations for group operations include thorough screening of applicants by the group administrator to make sure they meet the SIG marketing characteristics. "The lack of market targets and underwriting screens is an indication of poor group management, or a sign of desperate actions to prop up group membership, and should be a warning sign to the regulator," the report says.
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June 18, 2012
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