Self Insurance Etcetra

Self Insurance Primer

WHY SELF-INSURE WORKER'S COMPENSATION?

Even in good times, insurance represents a sizeable portion of an organization's expense. In the recent past, even though some insurance costs have decreased, management must still devote a substantial amount of time to obtain the best coverage, the highest limits and the lowest retentions required for the organization's asset protection and the lowest cost available.

Through the years various methods of funding risk have been devised. Some have lasted relatively intact. A retrospective rating plan that looks back at the final contract experience in order to make adjustments for experience, has remained as an alternative to the straight forward guaranteed cost plan. It was not available in the past in many markets but is now back with many states improving their worker’s compensation laws and benefits. A number of innovations such as managed care and return to work programs have also contributed to an improving worker's compensation climate. However, for those that have been self-insured for several or more years, the leading advantage is control, although the financial considerations still play an important role in the self-insured plan.

Self-Insurance, however, has been a viable alternative and a credible financial tool since the thirties. The reinsurance markets have been relatively stable with its share of the "ins and outs" but with a core of reliable reinsurers.

Let us now examine the major advantages of self-insurance:

IMMEDIATE CASH FLOW: With conventional insurance, an insured pays premium in advance of losses. That is, premiums are paid in some fashion starting with the effective date of the policy and prior to any losses taking place. With a self-insured plan, reinsurance and bond premiums are paid in the usual time frame. Claims are paid, not when they occur but when medical bills or benefits are required to be paid. This difference continues and improves since with the conventional insurance plan, premium payments are made without regard to claims paid.

REDUCED COSTS: Since the service organizations providing claims and loss control do not take risk, there is competition among these firms to provide the best service. Premium tax is paid only on the bond and reinsurance premiums charged by the carrier which is considerably reduced from the full insurance premium. Reduced claims costs will result directly in cost savings with self-insurance.

INPUT TO CLAIMS PROCESS: When was the last time your carrier discussed a claim settlement before it happened? With a self-insured program, you can establish a routine with the claims administrator where all settlements are discussed prior to settlement. It can also be arranged to authorize settlements below an amount without consultation. Perhaps $5,000 - $10,000, as an example. In other words, the self-insurer establishes the procedure with the service company. This also applies to the loss control program that is usually tailored to the exact needs of the self-insurer. If the self-insurer already has a risk management program department or a safety designee, then its loss control should be designed to assist those in-house efforts and not duplicate them. Control of claims and safety services has a decided long-term effect on the bottom line of worker's compensation costs. The control has shifted from the insurance carrier to the self-insurer.

INVESTMENT INCOME: What was the single motivation for the frenzy evidenced by insurance carriers in the late seventies and early eighties? Investment Income. That is the essence of cash flow underwriting. The opposite is risk underwriting. That is, the premium more truly reflects the risk taken by the insurer. Even with that, investment income plays a major role in the financial health of an insurer. A self-insurer retains that major benefit for itself. Those funds not used for claims payments are invested. Those funds allocated during the year as claims reserves and held until the claim is finally closed, are also invested and produce income.

REINSURANCE PROTECTION: With few exceptions, insurance companies do not take the full risk. They pass a portion of that risk to reinsurance companies that specialize in that market. Self-insurers do not assume the full risk either. Reinsurance limits risk in the aggregate as well as per occurrence. That is, aggregate coverage caps the total amount of losses at a predetermined amount. The specific or per occurrence coverage provides protection over a predetermined deductible for one occurrence regardless of the number of claims in that one event. Reinsurance takes the uncertainty out of self-insurance.

IMPROVED EMPLOYEE RELATIONS: With a claim procedure established by the self-insurer and the claims organization, clear cut claims should be paid immediately. This improves employee relations. At least, with the employees that are important to the employer. The new procedures for return to work, preferred provider organizations and utilization review along with other managed care techniques, all contribute to lower cost of claims along with early return to work of the employee.

ALVIN J SIMS is prepared to meet with you or your staff to do a preliminary qualification survey plan for your worker's compensation risk and to provide a full proposal for a qualified self-insured plan. All of this, without any cost or obligation. A worker’s compensation excess application is available.

REMEMBER, THE MAJOR ADVANTAGE IS CONTROL - YOURS NOT THE INSURANCE COMPANY.

WHY SELF FUND (SELF- INSURE) EMPLOYEE BENEFITS

Self-funding of group medical began in the early seventies prior to the passage of the 1974 ERISA act. Lloyd’s of London was the prominent underwriter. Because of their aversion to long tail products, self-insured medical was underwritten on a "paid basis". That is, for those claims that were incurred during the twelve-month contract period, reimbursement was made considering claims paid during the same contract period. Thus, the terminology, "incurred in twelve and paid in twelve". Variations have been devised since this initial founding. Secondly, self-funding was used in the hope that the attention of insurance regulators would not be alerted. However, the passage of ERISA solved that problem. States cannot regulate an ERISA plan is if it were insurance. States continue to attack this premise both by their regulations and by attempt at federal amendment to ERISA. It remains substantially intact regarding self-insurance of individual entities. It does, however, require filings and ERISA places liability on those involved with the management of the plan and any decisions that may place them at odds with ERISA and the plan of benefits. .

A major consideration for some self-insurers is the fact that since the state cannot regulate the ERISA plan as insurance, it cannot mandate that certain benefits must be included in the plan.

Basically, as in worker’s compensation, the self-insurer is responsible for the payment of claims within the policy retentions of both specific and aggregate. While worker’s compensation is written on an occurrence basis, self-insured group medical is underwritten on a paid basis. In addition, group medical specific excess is generally written as a retention-per-person per year all illnesses. It can be on a family basis as well. The coverage limits are different as well. The medical benefits provided will usually be a determinant factor.

The financial benefits flow from the elimination of premium tax that is currently paid on the fully insured premium; the use of funds not used to pay claims and investment income generated. In addition, the control of benefits delivered is an important advantage of self-funding. And, as stated above, the ability to design an independent plan of benefits without state mandated benefits.

Approved third party claims administrators provide claims adjudication using the plan of benefits and also provide plan administrative services such as enrollment, premium collection and plan documents as well as filings to the Department of Labor, as required.

Unlike worker’s compensation, there are a vast number of insurers providing group medical reinsurance. Most life companies as well as those that specialize such as Lloyd’s of London are available to provide competitive proposals. An application for reinsurance proposals is available upon request.

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