Financing A Self-Insured Plan

Types of Funding - Funding Considerations - Setting the Self-Insured Retention - Service Provider Charges

Employers arranging a self-insured employee benefits health plan can either pre-fund claims payments by setting aside an amount equivalent to their expected claims costs or alternatively pay claims as and when they arise out of their general assets.

1.Types of Funding

(i) Funded Plans are those where assets are set aside at the start of a program to meet the costs of claims. Often these monies are set aside in trusts and therefore segregated from an employer's assets. (ii) Post-Funded Plans are those plans where funds are set aside as soon as claims become known. (iii) Current expense plans are plans where claims are treated as a general running cost and paid as and when they arise. (iv) Combination Plans are those plans which represent a combination of the above.

2. Funding Considerations

Whether a company wishes to set aside funds before or after claims become known, it is important to be able to predict a worst-case cost to the company and this is a function of determing the self-insured retention (SIR) and service provider costs.

3. Setting the Self-Insured Retention

A Self-Insured Retention, or S.I.R. as it is commonly known as, is the amount of risk that a company is prepared to retain for its own account. In other words, it is the point at which the specific excess insurance applies and the risk passes from the self-insurer to a professional insurer. Calculating the amount that a company stands to lose from a single or series of loss occurrences enables a self-insurer to calculate the maximum cost that it might have to pay out of its own resources. The size of the SIR will naturally vary depending on the size of the self-insurer but the following factors will need to be taken into consideration when determining what a SIR should be.

(i) The Experience of Self-Insurer

A new self-insurer will generally have less of an appetite for risk than a company that has been able to build up some experience. Self-Insurers generally err on the side of caution in the initial stages and increase their SIR's once they have achieved a certain level of comfort.

(ii) The Size of Company

Normally a larger company will be able to assume more risk than a smaller company. Companies need to be aware of the potential exposure to a series of losses however aggregate insurance is generally available to provide a known maximum potential loss. Larger companies are generally able to predict what their losses will be with some degree of certainty as due to their size they are prone to less fluctuation.

(iii) The Availability of Insurance and Reinsurance

Like all commercial insurance products, excess or specific and aggregate insurance coverage is prone to market forces and in some circumstances an insurer will insist on minimum retentions. For example a stop-loss carrier providing specific and aggregate coverage to employee benefit plans might insist upon a minimum specific SIR of $25,000 and a minimum aggregate attachment point of 125% of estimated losses rather than 110% which has been available in the past. Consequently whilst a self-insurer may wish to assume less risk its insurers can require it to retain a minimum amount.

4. Service Provider Charges

The Self-Insurer will need to be aware of what administrative charges it will have, any ongoing additional legal costs and the cost of excess insurance being purchased.