AWC Blog

Is Self-Insurance Right For You?

calculating the cost of self-insurance

For larger companies in most states across the country, workers’ compensation comes with two choices: traditional insurance or self-insurance. Knowing which to choose can be difficult and you should consider much more than the bottom line cost difference between the two when deciding what to do.

If your company meets the requirements, self-insuring may allow you to reduce costs while providing protection for you, your business, and your employees.

What is Self-Insurance?

When a company self-insures as an alternative to traditional workers’ compensation insurance, they are not relieved of the legal responsibilities of paying medical expenses and lost wages for their employees who become injured or ill while on the job. Instead of paying premiums to an insurance company who handles the claims process, the company uses funds set aside specifically for workers’ compensation claims, while overseeing the claims process internally.

There are some very clear advantages to self-insurance:

  • Reduced costs
  • Fewer claims due to more incentive to prevent accidents and reduce claims
  • Investment income may be generated on the funds set aside for claims
  • Better cash flow because medical bills and benefits are paid only when needed

 

Things to Consider Before Self-Insuring

Regardless of the advantages, you must also carefully consider the reality of self-insuring. You have fiscal, legal, and business responsibilities that must be met in order to comply with your state’s requirements for workers’ compensation benefits.

More administrative responsibilities will include maintaining loss records, filing reports with your state authorities and agencies, working with service providers, and more. Many employers outsource these tasks to third party administrators. You are still responsible for making sure you are compliant, even if another company handles the paperwork on your behalf.

Legal requirements for your state must be met, including posting a letter of credit or a surety bond to cover your company’s financial obligation. If you operate in multiple states, you will need to be aware of each state’s requirements.

Your tax considerations will change slightly. Instead of deducting the amount paid on your insurance premiums, you will need to wait until you’ve paid losses and expenses on claims before receiving a credit on your taxes.

Self-insurance is a long-term commitment. While it’s fairly easy to put a self insurance program together, it can be expensive to move back and forth between self insurance and traditional insurance programs. Give your program time to see the benefits. The programs you put in place to reduce claims or deal more efficiently with accidents may not yield obvious improvements at first.

How to Self-Insure

Becoming self-insured is a four-step process.

  1. Initial Review: Does your state allow self-insurance? What is your company’s loss rate for claims? How much are you paying for workers’ compensation insurance through traditional means? If your state doesn’t allow insurance, you typically have more claims than you pay in premiums, or your premiums are less than $750,000 a year, you may not be a good candidate for self insurance.
  2. Feasibility Study: Data collections of payroll, large loss details, number of employees; actuarial analysis for estimated costs in the year ahead; financial analysis of all associated costs; administration and operational considerations; state requirements; and verbal and written management approval.
  3. Implementation of the program: consent of regulatory bodies; claims handling process; safety and loss control program; application and approval to state authorities; escrow funds; and more.
  4. Monitoring the program: claims; safety; risk management; brokerage activities.

 

You may want to consider excess insurance or stop-loss insurance policies to protect yourself against large losses if you self insure. Pre-occurrence policies protect you against large, single catastrophic claims with reimbursements between $50,000 and $2 million, depending on your deductible. Aggregate policies protects against higher than anticipated claim activity; once the total claims paid exceeds a specific threshold, you’ll be reimbursed for the overage.

Self-insurance isn’t for every business, but if you’re large enough, without excessive workers comp claims, and a willingness to oversee the necessary administrative and legal requirements, it could be a smart business decision for your company.

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