Trusting in Workers’ Compensation Self-Insurance Programs

For larger risks, a self-insurance plan might be the right fit

As premiums for workers’ compensation rise, employers across the United States are looking for alternative ways to cover their risks. Some employers have found self-insurance programs to be one of the most beneficial strategies.

According to James A. Kinder, CEO, Self-Insurance Institute of America, the popularity of self-insuring for workers’ compensation shows no signs of waning.

“Self-insurance has certainly been on the rise and we don’t see any slow down of that at all, both in the self-insured group funds and the single employer. We also see movements toward revising legislation that would enable a broader base of companies to self-insure.”

“In the past few years people have broadened the definition of self-insurance,” said Frank Altiere, president of PMA Management Corp., headquartered in Blue Bell, Pa. “In theory, if you have homeowners insurance or automobile insurance, and you have a deductible of say $500 or $1000, you are self-insured up to that amount. And that is what is happening in the workers’ comp market. … So you may hear someone say they’re self-insured, but in essence they really have just bought a very large deductible.”
There are two main configurations to workers’ comp self-insurance plans—individual programs and group funds. Often, these are accompanied by stop-loss (excess) insurance policies.

The basic concept of an individual workers’ comp self-insured program is one in which the employer assumes the risk for providing benefits to its employees. So, instead of paying a set premium to an insurance carrier or to a state-sponsored workers’ comp fund, they pay for each claim as it incurs out of their own pocket.
Group self insurance programs—generally more common among small to mid-range employers—are not-for-profit associations of comparable employers formed to provide statutory workers’ comp and employer’s liability. This enables them to achieve relatively the same freedom and cost savings that an individual self-insurance program can offer.

Employers can also incorporate stop-loss or excess insurance to a program and frequently do, allowing them to self-insure but not assume all the liability for losses. In this regard, an insurance company becomes liable for losses exceeding a set limit or deductible.

According to Dick Giblin, Transportation Risk Services—an administrator of a workers’ comp self-insurance group in Pennsylvania—agents’ involvement in these programs varies. “We take business from outside agents and those agents can be as involved as they want to be. We pay outside agents a commission, however, what we have done is limit that to a maximum of five years. The reason for that primarily is because we do most of the work and the agents’ responsibilities are really very minimal.”
Promoters of these plans say that the benefits of self-insurance stem from having more control. The employer has the ability to be more involved with ensuring employees are properly taken care of when claims occur. Not to mention greater cash flow by lowering premium amounts.
Richard O’Brien, vice president of alternative market sales for Andover, Mass.-based Meadowbrook TPA Associates, cites the success of one of his programs in particular.
“Our sort of ‘poster child’ of cost savings is our transportation program, Common-wealth Transportation Compensation Corporation (CTCC), in its twelfth year of operation. If you look back, historically from day one to the current day, that group has earned dividends to the membership of more than 50 percent of the premiums paid in. So in a program like this, the members earn all the underwriting income and all the investment profits. So these folks have actually saved themselves more than 50 percent on their workers’ comp since the inception of the program, which is a very significant savings,” he said.
Workers’ comp is particularly well suited for self-insurance because often there is a pattern of high claims frequency, and low claims severity, which translates to a fairly predictable loss forecasting analysis. Also, the payment of large claims can be spread over time.

Although workers’ comp can be a good match for these programs, self-insurance is not for everyone. There is no clear cut sign as to when workers’ comp self-insurance should be considered or if it is the best option for any given employer. Altiere contends, “If an organization’s workers’ comp premium hits $1 million for example, because of the premium size, they are most likely going have many alternative risk transfer options available to them.”

According to the experts, an employer must analyze many factors to determine whether one of these programs is the right fit. Determining factors include the management’s commitment to the program, the state of the employers’ finances, the cost and condition of support systems and the types of risks.
Altiere suggests a number of questions an agent should encourage an employer to ask when weighing the option of self-insurance:
“Can I find a reasonably priced excess insurance policy? Am I willing to share my financial data with the state? Do I have a good safety program currently in place? Are my losses predictable? Do I know year-to-year what my frequency and severity is? What are my state requirements? Now that I am assuming the role of the insurance company, what is my tolerance for risk? Is senior management backing this 100 percent? Am I prepared to manage the high level of involvement?”

One challenge is more administrative work because in essence, the employer becomes the insurance company. The employer will be required to administer claims in-house or subcontract the duties to a third party administrator (TPA). In most cases, employers running these programs use a variety of service providers to help them. TPAs often set up and operate plans in addition to coordinating excess insurance coverage. Controlling claims is also necessary as it can more directly affect the net income, which can require additional financial and managerial resources.
Of course, while self-insurance may be financially appealing to some employers, it is not without its risks.

“The trade-off is people are accepting joint and several liabilities for all the debts of the self-insurance program. So there is always the possibility that in any given year the individual or group may spend more than it takes in and then they would have to pay the difference,” O’Brien notes.

“So agents especially want to be very careful about really doing their homework on the self-insurance program or group that they propose to their client. If a group has very liberal underwriting guidelines chances are they are letting in accounts that may be harmful to the group,” he added.

For more information on self-insurance programs for workers’ comp, go to the Self-Insurance Institute of America’s Web site at www.siia.org.