A self-insured Workers’ Compensation program is one where the employer takes on the responsibilities of the insurance company for both their employees’ workers’ compensation benefits and compliance with the state’s regulations and reporting requirements. In doing so, the employer can gain significant insurance cost savings.
In determining whether it makes sense to become a self-insurer, there are several key factors to consider: the company’s financial strength, understanding and experience of risk-bearing programs such as large deductibles, evaluation of potential cost savings, and commitment to good risk management and HR practices.
One of the critical components in the evaluation process is the modeling of payroll, premium and claim cost projections. This data provides the basis for analysis of what loss retention levels to consider, and potential funding needed to cover the retained loss exposure. Other important components are identifying an insurance carrier to provide Excess coverage and selecting a third-party administrator (TPA) for claims handling and management expertise.
To become self-insured an employer must receive approval from the state where they intend to be a self-insurer. Each state has its own application and approval process. Individual state qualifications and requirements vary. Fortunately, some of the same key elements that are used when considering self-insurance are also part of the state application process. This may include reviewing financial statements, planned per-loss retention level, who will be providing claims administration, historical payroll, and loss information in the state. If the employer has operations in other states, information on the out-of-state operations may be requested as well.
Inside a Company’s Financial Position
While self-insurer requirements vary by state, all states have minimum financial requirements to ensure an employer can meet its expected Workers’ Compensation obligations. Employers must meet certain solvency standards and provide any collateral the state may require.
Risk-Bearing Experience
Most employers considering becoming a self-insurer already have experience with large-deductible risk-bearing programs. Having an understanding of the cash flow, financial and collateral requirements of conventional Workers’ Compensation deductible insurance programs can make the process less intimidating due to this experience.
The employer, in a Large-Deductible program, had to provide the carrier collateral in the form of cash or a letter of credit to cover the insurer’s credit risk for the anticipated loss obligations the insured agreed to pay.
With a self-insurance plan, it’s the state that sets collateral requirements to ensure that the employer can meet the state’s statutory Workers’ Compensation obligations. In addition, the employer is required to purchase an Excess insurance policy to limit the employer’s financial exposure of any single loss. The amount of pre-loss exposure retained is one of the financial factors reviewed by the state. This retained amount is known as the “attachment point.” It is important to select a financially appropriate attachment point. Since the insurer issuing the Excess policy has no obligation to pay any claims below the attachment point, the state is the one concerned with the monetary obligations of the employer.
Importance of Risk Management and HR Practices
A self-insurance plan brings greater awareness of the impact that strong risk management and HR practices have on achieving fewer and less severe injuries. In preparing to self-insure, an employer should be engaged in implementing and practicing robust safety and hiring protocols. Establishing and maintaining good risk-management practices will have a positive long-term impact on the claim costs.
Why Is a Third Party Administrator “TPA” So Important?
Identifying and selecting a TPA is another critical component of being a successful self-insurer. A qualified TPA will provide advice on regulation, compliance, and the submission of any state required claims data reporting. Other services include claims processing and claims management expertise, medical bill review, medical utilization review, and nurse case management services. They may also offer medical provider networks and telemedicine services. Good services in these areas will help reduce claim costs.
It’s important that the employer carefully reviews the TPA contract and understands the services provided and all associated fees. Billing methodologies vary and fees range widely among TPAs and can add up very quickly.
Prescient National Insurance Company
Prescient National Insurance Company has an AM Best “A” rating. We offer self-insured clients with both the Excess insurance coverage and TPA services they need for a successful program. We bundle our services, which is cost-effective for an employer. We work with insurance agents and brokers who can help facilitate the entire process. In addition, we can write Excess coverage with lower attachment points than most insurance carriers. Being required to retain a high attachment point may make the financial risk too burdensome for some employers who would otherwise qualify to be a self-insurer.
We are a licensed Workers’ Compensation carrier in all the states we offer Excess coverage. Therefore, an employer does not have to be concerned with being approved to process claims.
Our extensive knowledge in settling claims cost effectively, as part of our TPA services, is reflected in the results we deliver. Over the past 10 years, our average claims cost has been 38% below the industry average.
