Considerations for Self-Insuring Employee Benefit Trusts
When a company self-insures its employee benefits, it will assume additional administrative responsibilities and will need to replace many of the normal administrative functions of an insurance company. These administrative tasks include paying claims, maintaining loss records and working with service providers such as hospitals and specific and aggregate insurers. Consequently, all but the largest self-insured employers normally outsource these functions to a specialist third party administrator.
Monitoring the performance of the plan is critical to the success of the self-insured program. Self-insurance, therefore, requires the full of support of senior management, which needs to actively encourage claims and loss control programs.
As the employer is responsible for the first part of any claim, it now faces a financial risk. However with the correct structuring of a stop loss (or specific and aggregate) insurance policy, this exposure can be controlled with a limited financial downside. Although the price of the stop loss coverage will be subject to change as a result of experience and market conditions, the cost will be significantly less than standard healthcare fully-insured coverage due to the high deductible or self-insured retention.
Whereas premiums under some insurance programs are generally tax deductible, in most jurisdictions only paid losses and expenses are tax deductible as opposed to reserves. No credit can be taken until claims are actually paid.
Self-insurance should always be viewed as a long-term commitment. The reason for this is that it can be expensive and time-consuming to move back and forth between conventional and self-insurance. In addition, the true benefits of self-insurance are best judged over a period of time since a single year's results may not be representative of the true savings. In addition, sound working relationships with service providers can take time to develop.