Who Self-Insures for Workers’ Compensation in California?

Workers’ compensation liability is one of the main commercial lines in the U.S. property/casualty market. In order to manage this loss exposure, employers have two choices: they can either buy market insurance or implement an alternative risk-financing technique in the form of self-insurance.

In lieu of buying an insurance policy from an insurer, employers may use self-insurance to retain their workers’ comp risk, take a key role in loss control activities and exercise greater control over their claims. In 2011, self-insured employers paid $24 out of every $100 of WC benefits paid in the U.S. Self-insurance is most prevalent in WC risk management — and it accounts for about three quarters of the total alternative risk transfer market.

Self-insurance offers some potential benefits over market insurance. It is believed by self-insured employers that the former should be cheaper than the latter over the long run. However, the use of this alternative risk transfer technique in the form of self-insurance is linked to the industry with which the employers are affiliated.

Understanding self-insurance choice in different industries is helpful for insurance agents and brokers to develop their marketing strategies.

California has the largest workers’ comp self-insurance program in the nation. Total workers’ comp benefits paid in the state in 2011 reached $10.5 billion, more than twice what was paid in New York, which ranked second in workers’ comp benefits paid.

According to the Office of Self Insurance Plans in the California Department of Industrial Relations, 9,849 California employers were actively self-insured as of Jan. 1, 2014. In the aggregate, one out of four California workers is covered by self-insured workers’ comp. Roughly 53 percent of employees of self-insured employers are in the private sector.

It is important to understand why firms choose to self-insure because this decision process offers an example of how firms make choices in the midst of uncertainty. That is why it is valuable to examine the attributes of private employers that forgo market insurance in favor of self-insurance for their workers’ comp liability.

In California, retail trade has the largest number of employees covered in self-insurance programs as shown in Table 1.

More than 600,000 workers in the retail trade industry are employed by active self-insured employers in the private sector in the state, accounting for nearly 30 percent of employees of all self-insurers. Another 25 percent of workers of all self-insurers are employed in health services. In other words, about one-in-two workers of self-insurers is employed by retailers and healthcare providers.

The manufacturing and agriculture industries rank third and fourth when it comes to the number of employees of all self-insured employers. Roughly 8 percent of all covered workers are affiliated with manufacturing, and 7.5 percent are with agriculture.

The preference for self-insurance for workers’ comp liability is particularly observed in some industries, such as utilities, retail trade and healthcare, according to the proportion of total workers employed by self-insurers in each industry based on the North American Industry Classification System.

As shown in Table 2, the vast majority of employees in the utilities industry are covered by self-insured employers. Self-insurers hire roughly 40 percent of the total employees in the retail industry and 30 percent of the total workforce in the healthcare industry.

Roughly one-in-five employees in the construction, manufacturing, and transportation industries is covered by self-insurance programs for workers’ comp losses. Nevertheless, the self-insurance technique is barely used or not accepted at all by the employers in some industries, such as finance and insurance, real estate and professional services. The acceptance of self-insurance as a risk-financing tool varies considerably from one industry to another.

Those industries with nonfatal incidence rates higher than the national average are positively correlated with a larger proportion of total workers employed by self-insured employers, according to Table 2.

In particular, the coefficient of correlation between nonfatal incidence rates and self-insured employee proportions is as high as 0.60 for all industries, excluding mining and utilities since each of them accounts for less than one percent of the total workforce in California.

Nonfatal incidence rates are indicative of the levels of occupational injury risk to which employers in the same industry are exposed. Employers in the industries with higher levels of work-related injuries and illnesses are prone to an alternative risk financing technique for their workers’ comp risk.

In the face of high nonfatal workers’ comp injury incidence rates that contribute to high premiums for workers’ comp insurance, employers in the retail trade, healthcare, construction, manufacturing and transportation industries are more likely to choose self-insurance over market insurance in hope of dealing with workers’ comp liability more effectively.

Essentially, an employer’s decision to self-insure can be influenced by several factors, such as firm size, industry affiliation, workers’ comp insurance costs and the self-insurance pattern in an industry. The self-insurance marketplace in California, the largest in the nation, indicates that self-insurance is most commonly used in the retail industry.

Some big retailers — such as Target Corp., Macy’s Inc., Costco Wholesale Corp., Safeway Inc., Home Depot, and Victoria’s Secret — have put a self-insured workers’ comp program in place to mitigate workers’ comp losses. Risk attitude toward self-insurance among these companies reflects that they would rather take financial risk on their own by self-insuring than transfer it to insurance companies.

Chang is an associate professor of finance and insurance in the David Nazarian College of Business and Economics at California State University Northridge. He received his Ph.D. in risk, insurance, and healthcare management from Temple University and his MBA in international business from the University of Southern California.