Why Self-Insured? The Good, the Bad and the Ugly Truth!
At the 2022 Executives in Workers Comp Conference, a panel discussed the benefits of self-insurance for your workers compensation program. The speakers were:
- Jeffrey Einhorn – CEO, NonProfits’ United
- G. Michael Lyon – President, SIG Solutions, Inc.
- Lyn Booz – Chief, Office of Self-Insurance Plans
- Jon Wroten – Managing Director, California Risk Advisors LLC
It is important for self-insured employers to maintain strong loss control programs because they are spending their own money until reaching their excess policy’s retention level. Great loss control practices can lower claims costs and improve outcomes for injured workers, resulting in additional savings compared to first-dollar (guaranteed cost) coverage. Essentially, an employer is receiving a financial benefit for great performance.
Self-insurance can also improve an employer’s cash flow compared to a first-dollar policy. First-dollar policies require the entire premium to be paid upfront, covering claims that will be paid over several years. Conversely, self-insurance allows employers to pay out their claims costs as incurred instead of upfront. This frees up money for an employer to invest in other areas of their business.
Group self-insurance, or pools and associations, provide an opportunity for multiple employers to band together as a group to receive the benefits of self-insurance. Many states require these pools to have common business interests, such as non-profits, healthcare or trucking. Additionally, states require approval to operate with minimum capital required for establishment. Each group also has a board of trustees, whom are heavily involved in the oversight of the program. The group is also backed by an excess carrier who provides coverage above what is retained by the group. Strong underwriting guidelines, commitment to loss control and superior claims services are key to a successful group.
California has the largest self-insured system in the country, covering 4.34 million workers. The public sector makes up about 46% of these workers. Public employers make up 70% of all open claims for self-insured employers with first-responder presumptions contributing heavily to the extremely long-tail claims.
To be approved for self-insurance in California, private employers are subject to a financial review that reviews three years of data. They must also meet a minimum credit rating with various rating agencies. Self-insureds provide annual reports to the OSIP detailing all claims activity, an actuarial report and updated financial information. Private self-insured employers are required to post a security deposit which is held by the self-insured guarantee fund.
California OSIP conducts claim audits on private self-insured employers and groups to ensure the claims are being handled appropriately and reserves are set to realistic levels. The collateral posted is based on the open case reserves, so accuracy is critical.
California is unique in that their Self-Insured Security Fund (guarantee fund) provides an alternative securities program that can allow employers to post significantly less collateral if they meet certain heightened financial thresholds.