In pure self-insurance, an employer sets aside the money necessary to pay for all future losses. The amount of money necessary is calculated using actuarial information, insurance data, and the “law of large numbers” to calculate the probability of loss and the cost of expected incurred losses. If the employer does not have the available capital to place in reserve for future losses, self-insurance is not a viable approach to controlling risk.
Self-insurance for workers compensation benefits the employer in several ways, including:
- Lowering the overall cost of insuring for risk. The portion of the insurance premium that would be the profit for both the broker and the insurance company is retained by the employer. The amount of money set aside for the self-insured risk is used for paying claims and administering the claims management program.
- Providing better claims management. The claims can be either self-handled or administered by a third party administrator (TPA) where the TPA adjusters follow the directions and suggestions of the self-insured employer. It gives the employer more control over the claims handling situation.
- Lower claim cost and claim adjusting expenses. The TPA, especially a local and or regional TPA, can be flexible in designing and pricing the claims administration services.
- Self-insured employers also have a vested interest in the return-to-work program, ergonomics of the workplace, and having integrated safety programs.
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With the benefits of self-insurance, you would think all employers would want to self-insure workers compensation. The barrier most employers run into is the ability to self-insure for catastrophic losses. While many employers can set aside money for routine, day-to-day workers comp claims, the actuarial determination of the amount of money necessary to set aside for catastrophic losses is more difficult to ascertain. Often the employer can place into reserves the amount of money for one catastrophic loss; but what happens if the employer has multiple catastrophic workers comp claims?
Full self-insurance is seldom possible. For a company to be fully self-insured in a viable manner, they must be able to cover all future losses, even the remote possibility of multiple catastrophic losses. Often employers elect to either have a self-insured retention or a high deductible, or a combination of the two.
To be “self-insured” but also cover the exposure for catastrophic claims, employers often determine the level of self-insurance they can afford. The company then purchases excess insurance to cover the risk of loss over and above a specific threshold. For instance, with a self-insurance retention, the employer administers and pays all claims under a set dollar amount. For an example, $500,000. When the total cost of the claims exceeds $500,000, the excess insurer reimburses the portion of the claims over $500,000.
Another approach for a self-insured employer unable to set aside the necessary reserves for catastrophic claims, is a large deductible program. In a large deductible program the employer purchases a policy of insurance from an insurance company. The employer is responsible for reimbursing the insurance company for each claim in the policy period up to a dollar limit. The employer will also have a maximum amount of exposure for all claims combined.
To illustrate: the employer reimburses the insurance company the total amount paid on each claim under $500,000 (the large deductible amount), but when the insured pays a total of $2,500,000 (a stop-loss limit) on all claims, the insurance company takes over and pays all further claim costs during the policy period. The allocated loss adjustment expense (the cost of handling the claim) is often included in the claim cost in the large deductible program.
Self-insurance can be an excellent way to reduce the overall cost of insurance. Properly designed and administered, a self-insurance program can have a significant positive impact for the employer.
Author Rebecca Shafer, JD, President of Amaxx Risks Solutions, Inc. is a national expert in the field of workers compensation. She is a writer, speaker, and website publisher. Her expertise is working with employers to reduce workers compensation costs, and her clients include airlines, healthcare, printing/publishing, pharmaceuticals, retail, hospitality, and manufacturing. See www.LowerWC.com for more information. Contact: [email protected] or 860-553-6604.
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