Unfunded Self Insurance Is High Risk
Unfunded Self Insurance can lead to a company actually folding if there are enough claims that were never placed in a budget. These insureds do not usually have an accounting of the reserve funds required to meet future claims. The money is never really set aside. The funds are used for other company operations. This type of self insurance is becoming more of a rarity when compared to funded self insurance.
The danger with this type of self insurance for Workers Compensation revolves around the claims activity. Workers Comp self insurance programs drain budgets on a consistent basis. The investment gain stays negative as not enough capital can be accrued to sustain any type of earnings.
A claim or group of WC claims possesses enough variability to discourage this type of very risky budgeting. Many funding structures exist to at least partially cover a funded self insurance program.
Almost all states require at least $500,000 in liquid assets before the insurance departments will even begin to qualify a self insurance program. Unfunded self insurance exists in governmental units backed by the citizens of the respective state.
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