Self Insurance Etcetra

Financial Guarantees

All prospective self insurers as well as renewing self insurers must satisfy the licensing jurisdiction regarding the self insurer's ability to pay claims. This process starts with the submission of the latest audited statements to the pertinent regulator. This requirement is part of the licensing application. The regulator, after review of the self insurer's application along with the proposed reinsurance format, will determine the amount of financial obligation required to guarantee the payment of claims in the event the self insurer is unable to do so. If aggregate reinsurance is a part of the program, the amount of the aggregate loss fund is a large factor in the determination of the bond amount. This is due to the fact that the amount of the losses fund is the claims liability of the self insurer and for a new self insurer is generally the amount of the bond. In subsequent years, the outstanding claims are added to the proposed loss fund resulting an a new and higher bond amount, generally. Some states are not as strict about this but more and more have come to realize that this method guarantees funding for employees' claims in the event an employer bankruptcy and the state has to assume the claims run-off supervisory role.

The financial instruments acceptable by the regular authorities are:
Cash
Securities (U.S. Government, (e.g.)).
Surety Bonds written by a carrier licensed in the jurisdiction
Letter of Credit (LOC)

The first three instruments are acceptable in all jurisdictions. However, not all will accept a LOC directly to satisfy the financial requirement. The LOC is generally obtained from the client's bank but the cost can vary and shopping may be in order.

Surety bonds require underwriting by the surety carrier. At this writing, July 1998, the market is soft and there is competition. The financial condition of the applicant will determine if the bond will be written with or without collateral, or if at all.

A review should be conducted to obtain a provisional approval of the financial guarantee as well as an indication of the reinsurance availability. At that time the client can determine if they want to go forward with the process.

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