Workers Compensation Self-Insurance. Are You Ready?

Alternate methods to finance workers compensation exposures become more attractive when the traditional insurance market hardens. Workers compensation in particular lends itself to self-insurance due to several aspects inherent in its nature.

• 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.