- There
is a statutory cap on loss wage benefits paid that brings an element of
certainty to the severity of losses to be expected.
- The
payment of large claims is spread over time providing cash-flow advantages
to the self-insuring employer.
- Typically,
workers compensation loss patterns are high volume, low severity, which
translates to fairly predictable loss forecasting analysis.
The decision to self-insure cannot be
made in isolation by a risk manager or any other individual. It requires
careful consideration of all factors, including management's commitment to the
program, the financial condition of the organization, the cost and availability
of internal and external support systems, and the particular characteristics of
your exposure. Unless all of these elements are included in the decision-making
process and self-insurance is undertaken with knowledge of the risks and
resources it entails, the program's chances of success are small.
Management Perspectives
In a self-insurance program, your
organization will trade known risk for unknown risk. Management must understand
the risk tolerance necessary for a long-term commitment to self-insurance.
Self-insurance should never be used solely as a band-aid to bridge market
conditions. Management must also be willing to adopt a hands-on proactive role
in claim prevention and management, since the money being spent has a direct
and immediate correlation to the organization's financial bottom line.
Financial Feasibility
A second component that must be
analyzed in making the decision to self-insure is the financial condition of
the organization and the financial resources that will be needed to fund the
program at startup and in the future. Financial strength is especially important
since self-insurance exposes the organization to larger fluctuations in
earnings than it experiences under most insurance programs. Most states have
minimum net worth requirements for employers to be eligible to self-insure.
Organizations contemplating self-insurance should check state financial
eligibility requirements first
Infrastructure
Capabilities
Cost savings in workers compensation
self-insurance programs are derived from two sources—lower medical and
indemnity payments to the employee and lower expenses associated with
administering the program—an evaluation needs to be made of the organization's
internal resources to determine what components of the program (if any) must be
outsourced. Self-insurers must provide a wide range of professional services
that insurers previously provided.
- Medical
knowledge is required to evaluate and process claims, and to negotiate
services with providers.
- Legal
judgment will be required to assess the merits and potential cost of
litigated claims.
- Actuarial
assistance will be necessary to forecast future loss projections for the
organization.
- Safety
and loss control programs overseen by engineers or other appropriate
professionals will also be a vital component in a self-insurance program.
In most cases third-party
administrators (TPAs) will be contracted to provide most of the services
insurance companies traditionally perform. TPAs assume no underwriting risk,
collect no insurance premiums, and have no ownership in loss reserves. They are
paid a fee to perform in specific administrative and professional capacities.
Loss Control & Risk
Management
Another crucial step in the
self-insurance feasibility process is for the organization to review and assess
its operations and exposures. Having a firm handle on operational exposures
will go a long way in making the program success.
Summary
There is no hard-and-fast rule that
dictates when workers compensation self-insurance should be considered. But,
when an organization reaches the point where exploring alternatives to workers
compensation insurance makes sense, then it becomes essential for an
organization to fully evaluate the factors that affect that decision. These
include but are not limited to management's attitude toward risk, the
organization's financial strength and objectives, the internal risk management
capabilities of the organization, and the nature of the organization's
operations and loss exposures.
