August/September 2020  Volume 18, Number 4        

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How Does Self-Insured Workers Compensation Work?

Self-insuring is an increasingly popular alternative to purchasing coverage from traditional providers. There are advantages and disadvantages.

Most companies purchase workers compensation coverage from traditional providers, either through a private insurance company or from a state-owned insurance company. You pay your premiums and your insurer takes care of handling and paying all claims, and it bears all financial risk.

Self-insurance is an alternative that has become increasingly popular among many larger employers.

What Are the Benefits?

  • By taking a pay-as-you go approach to paying claims rather than paying high premiums, you free up cash flow
  • Claims management expenses are usually lower when handled in-house or by a service company or third-party administrator (TPAs)
  • Administration costs are usually lower because you are not paying for insurance company profits and the insurance company's higher overhead costs.

What are the Disadvantages?

Lack of Expertise

Most companies have no expertise in claims handling and loss control. But there are very workable solutions to these problems. In fact, most self-insureds don't handle their own claims. They use service companies or TPAs for these and related services. For example, depending on the industry, specialized medical and legal knowledge may be required, along with negotiation skills, risk management, safety and loss control expertise. All these services can be outsourced to reputable and reliable providers.

Severity and Frequency Issues

The other disadvantage to self-insurance is that while most claims are small, a single large injury claim can wipe out whatever reserves you’ve allocated to fund your workers compensation losses in a particular year. Two or more such losses could be devasting. In addition, there could also be an explosion of small claims that add up to break the bank as well.

The simple solution to both scenarios is to purchase insurance — or, as it's called in some parts of the country, reinsurance (since the primary insurer is the self-insured business). This is not typical workers compensation insurance, however. It's money to pay the workers compensation losses that you, as a self-insurer, have taken on for yourself if your losses add up to too much for your budget.

Two types of insurance available

Specific Excess Insurance limits the amount you must pay out on any individual claim. And Aggregate Excess Insurance limits the total amount you must pay out for all losses per year.

Primary Reasons an Employer Might Want to Consider Self-Insuring Workers Comp

  • You have good claims experience and think you’re paying too much.
  • There's a lot of money held up in claims reserves that you are not getting cash flow benefit from.
  • You would like to be more involved in the claims handing experience.

Of course, self-insurance is not a practical alternative for many businesses, simply because they are not large enough to scale to the level needed to make self-insurance really work. But even then, it's good to know about it. Because even if you aren't sufficiently large now, you become so someday.

Please give us a call if you'd like to explore your self-insurance options.

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In this issue:

This Just In...

COVID-19 Impact on Workers Compensation Industry

COVID-19 Liability Waivers

How Does Self-Insured Workers Compensation Work?

Excess Workers Compensation Comes in Two Basic Formats.



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