With the extended downturn in the economy, most workers’ compensation insurance companies find themselves with a combined loss ratio in excess of 100, which means they are losing money. When insurance companies start losing money, they start raising their premium rates. In response to rising insurance cost, many employers are considering self-insurance for their workers’ comp coverage.
The financial considerations for self-insurance include lower insurance cost, lower claim adjusting cost, better claim management, and lower state assessments. Other considerations include better integration of safety programs, better employee relations, and better management control.
Lower Insurance Cost
The lower cost of insurance is the initial reason most employers consider self-insuring. When an employer purchases insurance from an insurance company, the amount paid for the insurance premium includes:
- The cost of claims.
- The cost of administering those claims.
- The operating expenses of the insurance company.
- The insurance company’s profit.
By self-insuring employers eliminate the insurance company’s profit and the insurance company operating expenses (but assumes additional operating expenses of their own).
The employer is able to self-insure because the amount of workers’ comp losses are predictable based on experience. By knowing the amount of predictable losses, the employer self-insures for those amounts and purchases an excess insurance policy only for the losses deviating above the norm. Thus, the self-insurer purchases less insurance than would be purchased through a full-coverage workers’ comp insurance policy.
Lower Claim Adjusting Cost
While the Fortune 500 companies operate their self-insurance programs in many states, most self-insured operate in one state or a few states. Smaller operations allow them to use the services of the smaller third party administrators (TPA) able to provide excellent claim services at prices below what national and international TPAs must charge. The smaller local or regional claim administrators are more flexible in crafting and pricing the claims administration program to the needs of the self-insured employer.
Better Claim Management
When the insurance company adjuster is handling an employer’s workers’ comp claims, the adjuster tend to want to do things his/her own way. While an employer may make recommendations and suggestions to the adjuster, in the end the adjuster follows the instructions of the claim office supervisor, not the employer’s wishes. When the TPA’s adjuster is handling the workers’ comp claim, the self-insurer/employer the boss. The recommendations, suggestions, and directions provided by the employer will be closely followed by the TPA adjuster.
Assessments and Taxes
The cost of state assessments and taxes are included in the insurance policy from the workers’ comp insurer. The insurance carrier pays required assessments not levied on self-insurers. These include: the state assigned risk pool, the second injury fund, and insurance guarantee fund. When these assessments are levied on the self-insured they are lower because the insurance company assessment is based on premiums while the self-insured pays the assessment base on claim payments.
However, assessments do not always go in the favor of the self-insured company. Some states require self-insured companies to pay into a state self-insurance insolvency fund to cover claims from self-insurers who are insolvent.
Companies switching to self-insurance almost always improve their safety programs to reduce or eliminate as many workers’ comp claims as possible. The employer who properly manages the loss prevention program will find the cost savings from workers’ comp self-insurance to be substantial.
Integration between the self-insurance program and the loss prevention program is much more complete within the employers who self-insure. When the insurance company is paying the claims, the motivation to prevent injuries is there but is not felt strongly. There is a greater motivation to get the most out of the loss prevention program when your company is paying the claims.
A side benefit to the self-insuring employer is the ability to build better employee relations when an employee is injured. Employees often find comfort in the fact that their employer is in contact with them and it will be their employer making the decisions on their workers’ comp claim rather than an adjuster of an insurance company.
Self-insurance often blends into the management philosophy of many employers who feel more comfortable being in control of the cost of the corporation. The self-insurance program allows the employer to participate actively in the claim management process and the associated cost of the claims.
Self-insurance allows the employer to reduce the cost of the workers’ comp insurance program. The self-insurer benefits from lower insurance premium/loss cost, lower claim handling cost, has better claims management, and lower assessment and taxes. The self-insurer also benefits from a more integrated safety program, better employee relations, and stronger management control. For more information on self-insurance programs, please contact us.
Author Rebecca Shafer, Attorney/Consultant, President, Amaxx Risks Solutions, Inc. has worked successfully for 20 years with many industries to reduce Workers’ Compensation costs, including airlines, healthcare, manufacturing, printing/publishing, pharmaceuticals, retail, hospitality and manufacturing. Contact: RShafer@ReduceYourWorkersComp.com or 860-553-6604.
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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker or agent about workers’ comp issues.
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