Who Should Consider Self-Insurance?

The Ability to Self-Insure - Ideal Candidates for Self-Insuring Employee Benefits 1. The Ability to Self-Insure

There are two main areas for a company to consider when it is deciding whether to become self-insured. Firstly, its ability to assume risk and secondly its ability to allocate the time and resources to implementing a self-insured plan.

(i) Ability to Assume Risk

The size of a company will often determine the ability to assume risk. Generally, the larger a company is the more predictable will be the claims cost of a benefit plan. Actuarial studies show that claims experience is most stable and predictable for companies with 250 or more employees. Employers with less than 250 workers are subject to more fluctuation in terms of the percentage cost of claims against premiums and consequently often the decision to self-insure is based on the availability of stop-loss insurance. Stop-loss insurance lowers the maximum amount that a self-insurer can lose from any one claim as well as the maximum amount that can be lost from an unexpected series of losses.

(ii) Allocation of resources

Self-Insurance requires a commitment from management to implement a plan, which involves time as well as an up-front cost arising from the need to develop the plan and take legal, accountancy and consultancy advice.

Smaller employers may often not have the resources available as the cost of implementing a plan does not reduce proportionately with size. A minimum recognised size for self-insuring employee benefits is 25 employees although in the past few years this has come under scrutiny from some state regulators who have expressed concern that companies of that size are too small to properly manage and control a self-insured plan.

A hardening stop-loss market has also played a role in pushing this minimum size up as nowadays many stop-loss insurers refuse to quote premiums for groups with less than 50 or 75 lives.

2. Ideal Candidates for Self-Insuring Employee Benefits

Ideal candidates for self-insuring are employers that meet all of the following criteria;

1. They are large enough to project future claims costs with some degree of accuracy.
2. They are large enough to assume some risk.
3. They have access to stop-loss (specific and aggregate) insurance.
4. They have better than average claims experience.
5. They have access to reliable service providers such as third party administrators.
6. They have a stable and sufficient cash flow.
7. They can interpret and manage reports