Considerations for Self-Insuring Workers' Compensation

Being aware of the following features of workers' compensation will help an employer arrive at the point where they can analyse whether self-insurance is for them.

Increased Administrative Responsibilities

These will increase if a company is self-insuring as many of the functions of an insurance company will need to be replicated. Most of these responsibilities, however, can be outsourced to a service provider such as a third party administrator. These administrative tasks include maintaining proper claims records, filing reports with state authorities and working with service vendors and consultants. 

Monitoring the performance of all the component parts is critical to the success of the program and there needs to be the highest level of support by senior management who also need to recognize the need to actively encourage claims and loss control programs.

If handled correctly, self-insurance can create a safer workplace with better employee morale and higher retained earnings. 

Managing Financial Risks

In deciding whether to implement a self-insurance program, there are a number of decision criteria that need to be considered.

As the employer is responsible for the first part of any claim, it now faces a financial risk however with careful structuring of the specific and aggregate policy this exposure can be controlled with a limited financial downside.

Of course, the price of the specific and aggregate coverage is subject to change however the cost is significantly less than standard workers compensation coverage and with increased safety awareness, the company may well have an improved loss experience as a self-insurer. 

Legal Requirements

Each state that permits self-insurance for workers’ compensation has specific requirements that must be met before an employer can self-insure. These include posting a letter of credit or alternatively a surety bond from a surety provider to cover the company's own financial obligation as a result of the self-insured retention. In this way the injured worker is still protected should his or her employer go out of business. 

Awareness of Tax Considerations

Generally, whereas most premiums under insurance programs are tax deductible, under a self-insured program generally only paid losses and expenses are deductible as opposed to reserves. In other words whilst a self-insurance program does not result in the loss of a tax deduction, the employer needs to be aware than no credit can be taken until claims are actually paid.

The need for a Long-Term Commitment

Whilst all the component parts of a self-insurance program are relatively easy to put together, self-insurance should be viewed as a long-term commitment since it would be expensive and time-consuming to move back and forth between conventional insurance and self-insurance. 

In addition, the true benefits of self-insurance are best judged over a period of time, as features such as loss control mechanisms will take some time to become established.

Also in this section

A History of Workers' Compensation
Reasons to Consider Self-insuring Workers' Compensation
The Information You Will Need to Self-Insure Workers Compensation
Self- Insuring Workers Compensation - The Four Step Process
How Workers Compensation Excess Insurance works
Selecting an Excess Insurer for Workers Compensation