"Employee benefits trusts represent the largest most utilized form of self-insurance in the world today. Today in the USA, over 50% of large corporations use these vehicles to self-fund their employee benefits. With employee benefit trusts, profits are retained by the trust and insurance is normally purchased to protect a trust from large as well as an unexpected aggregate frequency of losses."
Self-insuring employee benefits allows an employer to design a health insurance policy for its employees with its own plan of benefits which can be tailored to suit the employer’s specific requirements. A third party administrator is usually appointed to process claims and to monitor the program.
Funds required to pay for the costs of the plan are set aside into a trust arrangement where income can accrue as funds are built-up in a tax efficient manner. Specific and Aggregate stop-loss is normally purchased to protect the trust.
Self-insuring employee benefits can enable a company to save premiums and also improve its financial performance. In addition self-insuring employee benefits can also enhance employee relationships and morale since benefit plans can be tailor-made to suit a workforce’s specific requirements. In the USA it is estimated that over 50 million U.S. citizens have employee benefits provided through self-insurance.
Self-Insurance for employer-sponsored medical benefits in the USA was facilitated in 1974 by the passing of the federal Employee Retirement Income Security Act. Since this laws’ enactment, self-insurance has become viable to thousands of employers who have been able to design benefit programs to suit their companies and their employees’ requirements.
Whilst self-insurance provides many benefits, there are additional administrative responsibilities that need to be considered as well as financial risks. Being aware of the following features of self-insuring will help an employer arrive at the point where they can analyse whether self-insurance is for them.
All except the largest self-insurers usually appoint outside companies to manage the administration of their plans. The reasons for outsourcing are principally the need to hire claims management expertise and to avoid the additional management costs that would be associated with self-administration. Outsourcing the claims function can also remove any potential conflicts of interests that might arise, since an employer may feel uncomfortable denying an employee’s claim.
The selection of the right plan administrator is an important component in maintaining a successful self-funded employee benefits plan. A company will need to ensure that not only are its funds being well spent but also that its employees and families are being properly looked after. In the USA where over 50% of medium to large companies self-insure their employee benefit plans, ERISA legislation requires the implementation of a quality-driven administrator and the Department of Labour (DOL) has interpreted the failure to implement an efficient administrative system for the sake of cost as a breach of fiduciary duty.
Stop-loss insurance, which is often referred to as Specific and Aggregate Coverage, is typically divided into two sections. Specific coverage protects the trust or self-insured fund from large individual losses excess of a deductible (known as an excess) and Aggregate protection which protects against a larger than unexpected number of individual claims.
As agents to the self-insurer the procurers of excess insurance have a fiduciary duty to the plan to get the best coverage for each plan from the best provider. When selecting a stop-loss provider, cost should not be the only consideration. As stop-loss is fundamental to most companies ability to self-insure (any large claims that were not recoverable could bankrupt the company), the self-insurer should ensure that the insurance carrier being selected meets several minimum requirements.
The Employee Retirement Income Supplement Act of 1974 (known as ERISA) permits companies in the USA to save money by avoiding state legislation and designing benefit plans tailored for their staff. This is achieved by setting up trusts which are often managed by companies known as Third Party Administrators. Third Party Administrators administer these trusts, negotiate agreements with healthcare providers and are responsible for paying claims.