The Four Step Process for Self-Insuring Worker’s Compensation
Step One - The Initial Review
How much does the company currently pay for its Workers’ Compensation coverage?
An approximate rule is that an employer should be spending in the region of $100,000 a year after any residual market loadings for it to be practicable for it to consider self-funding.
The company also needs to be aware of any special requirements that states may have in order for it to qualify as a self-insurer and these can include a minimum number of employees, size of the business and/or payroll.
It is also prudent to consider how long the process of becoming qualified can take as this can vary from as little as 14 days up to six months in some cases.
In which states does the company operate?
Whilst the majority of states permit self-funding, there are a few that do not such as Texas although Texas does allow the employer to reject Workers’ Compensation altogether.
What is the company's attitude to assuming risk?
As self-insurance requires assuming a portion of risk, there must be a commitment to bear a certain level of uncertainty over claims costs. Against this, the specific and aggregate protection will provide a maximum financial downside.
Does the company have an acceptable loss experience?
In other words, if it has consistently collected more in claims than it has paid in premium, it may well be the case that self-insurance is not appropriate as the company will now be responsible for these claims.
Step Two - CONDUCTING A SELF-INSURED WCA FEASIBILITY STUDY
The Stage One Initial Review serves only to identify whether the company is a suitable candidate for self-insurance. To further analyze moving to self-insurance, the services of a risk management consultant may be required. A study will need to be made by the consultant, which will involve a cost comparison as well as any operational considerations, and these should include as follows:
Data Collection
Data concerning all past losses will need to be compiled, broken down by state and payroll classification. Details of all large losses will also need to be included as well as numbers of employees over the last few years and going forward.
Actuarial Analysis
The next step is for an actuary to determine the estimated cost to the company for the upcoming policy year and to develop a loss pay-out pattern taking into account recoveries from the specific and aggregate coverage.
Financial Analysis
The company will need to take into account all of the associated costs to the program including loss costs, claims handling costs, safety and loss control charges, state fees and assessments, specific and aggregate expenses, consulting fees and collateralization costs.
Administrative Considerations
A decision will need to be made as to whether the claims will be handled internally or outsourced to a professional third party administrator. Generally, the latter is preferable as these service providers have experience in handling occupational claims and can also negotiate with providers of occupational healthcare to provide discounts on their services.
State Requirements
A feasibility study should include all the requirements of the particular states in which the company is self-insuring. This should include fees and assessments as well as bond requirements.
Management Approval
Following a written and verbal report managerial approval is required in order to move to the next step.
Step Three- Implementing a Worker’s Compensation Self-Insurance Program
The implementation stage involves the actual decision-making by the company, which will include selecting the right Third Party Administrator and Excess Insurer. The self-insuring company will also be responsible for providing the required information to the relevant state authority.
The steps in this process are generally as follows:
- Drawing up claims handling specifications in order to solicit bids from Third Party Administrators.
- Working with the third party administrator or an insurance broker to provide Specific and Aggregate coverage from an excess insurer as well as a bond from a bond provider.
- Drawing up a safety and loss control program to prevent and contain claims.
- Finalising contracts with the Third Party Administrator and Excess Insurer.
- Supplying a Letter of Credit to the State or alternatively purchasing a WCA Bond.
- Completing and submitting a self-insurance application for the State and obtaining approval from the regulatory authorities.
- Establishing banking procedures and escrow fund accounts as required by the Third Party Administrator to enable them to pay claims.
- With the help of a Risk Management Consultant, designing and installing a risk information system that enables the company to keep abreast of its claims experience and to be pro-active in preventing claims.
Upon the cancellation or the expiration of the existing insurance program, the company can now start operating as a self-insurer.
Step Four - Monitoring a Workers’ Compensation Self-Insurance Program
Becoming self-insured places a company in a similar position to that of an actual insurance company in that the self-insured company now has a financial interest in its own loss experience. As a result, self-insurance can bring additional benefits by creating an incentive to ensure that workplaces are as safe as possible.
Employees may now feel that their employer cares more about them which will lead to better morale and greater productivity. Should an employee have a claim, the chances are that it will be paid more quickly since it is coming directly out of the company's own funds rather than having to be submitted to an insurer's claims department.
To achieve all of this on a permanent basis a self-insurer should maintain systems that allows it to keep abreast of how its self-insurance plan is performing.
Claims
It is essential to have a Third Party Administrator who has experience in the business and who is able to evaluate claims, negotiate with providers and Managed Care Organisations and to provide claims reports to the company. The self-insurer will also have a duty to itself to audit its administrator's records on a regular basis as part of the general ongoing monitoring process.
Risk Management System
The company should maintain an accurate system of claims reporting which will enable it to monitor its losses and provide reports to its excess insurer as well as to allocate costs to any subsidiaries.
Actuarial Reserve Analysis
Periodically the company will need to obtain an actuarial opinion over the future development of losses to give it and excess insurers a comfort factor that the program is running satisfactorily. This may also be required for audit purposes to ensure that there are no outstanding financial liabilities of which the company is not aware.
Safety and Loss Control
This will need to be maintained and a statement of responsibilities and policy outlined with the appropriate delegation. In addition, a company's management will need to be fully supportive, and ensure that first aid and medical facilities are on hand, accident investigation procedures are in place and personal protection equipment available. Employee training programs will be beneficial as will the ability to investigate and learn from past accident experience.
Brokerage activities
Speaking to the company's insurance broker should not be a once a year activity as the relationships with the excess insurer is important to obtaining the best terms. In order to create confidence in the program, a self-insurer should keep its broker advised of all claims, potential claims as well as any other issues affecting the program which the insurance broker should then pass on to the excess insurer.
Also in this section
A History of Workers' Compensation
Reasons to Consider Self-insuring Workers' Compensation
Initial Considerations For Self-Insuring Workers' Compensation
The Information You Will Need to Self-Insure Workers Compensation
How Workers Compensation Excess Insurance works
Selecting an Excess Insurer for Workers Compensation
