Becoming Self-Insured - The Four Step Process

The Initial Review - Conducting a Feasibility Study - Implementing the Program - Monitoring the Program

1. Step One - The Initial Review

Becoming a qualified self-insurer is not suitable for every company so prior to expending resources to perform a feasibility study the following guidelines should be looked at:

1. How much does the company currently pay for its Workers Compensation coverage? An approximate rule of thumb is that an employer should be spending around $750,000 a year after 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 minimum number of employees, net worth and 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.
2. 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 this state does allow the employer to reject the WCA act altogether.
3. What is the company's attitude to assuming risk? As self-insurance assumes a portion of risk there must be a commitment to bear a certain level of uncertainty over claims costs although the specific and aggregate product will provide a maximum downside.
4. 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.

2. Step Two - Conducting a Feasibility Study

The Stage One Initial Review serves only to identify whether the company is suitable candidate for self-insurance. To further analyse a change to self-insurance the services of a risk management consultant will 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:

1. 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 need to be included as well as numbers of employees over the last few years and going forward.
2. 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 payout pattern taking into account recoveries from the specific and aggregate coverage.
3. Financial Analysis. The company will need to take into account all 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.
4. Operational Considerations. The first operational issue to address is 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 claims and can also negotiate with providers of occupational healthcare to provide discounts on their services. Another issue is whether the state's security requirements will have any impact on the company's credit line.
5. 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 bonding requirements.
6. Management Approval. Following a written and verbal report managerial approval is required in order to move to the next step.

3. Step Three-Implementing the Program

This 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 most important steps in this process are as follows:

1. Obtaining consent from the state to self-insure and discussing their regulatory requirements.
2. Working with an insurance broker to provide specific and aggregate coverage from an excess insurer as well as a bond from a bond provider.
3. Draw up claims handling specifications in order to solicit bids from Third Party Administrators.
4. Draw up a Safety and Loss control program to prevent and contain claims.
5. Complete and submit a self-insurance application for the state and obtain approval from the regulatory authorities.
6. Finalise contracts with the Third Party Administrator, Excess Insurer and WCA Bond Provider.
7. Establish banking procedures and escrow fund accounts as required by the Third Party Administrator to enable them to pay claims.
8. With the help of a Risk Management Consultant design and install a risk information system that enables the company to keep abreast of its claims experience and to be pro-active in preventing claims.
9. Upon cancellation or the expiration of the existing insurance program, the company can now start operating as a self-insurer.

1. Being self-insured places a company in a similar position to an actual insurance company in that it has a vested interest in its own loss experience. As a results self-insurance can bring additional benefits by creating aan incentive to ensure that workplaces are as safe as possible. As a result employees will feel that their employer cares more about them which will lead to better morale and greater productivity. If they do have a claim the chances are that it will be paid more quickly as 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 enables it to keep abreast of how it self-insurance plan is performing.
2. 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.
3. 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.
4. 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.
5. Safety and Loss Control. This will need to be maintained and a statement of responsibilities and policy outlined with 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.
6. 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.