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Six Self Insurance Program Mistakes And How To Avoid Them


Self Insurance Program Mistakes Can Be Costly

Below are six self insurance program mistakes and how to avoid them.  Over the last several weeks, I have received numerous emails from Workers Comp self-insureds.  Most of them were reminders to write articles about self-insurance programs.

Graphic of Self Insurance Program Concept

The six mistakes some self-insureds make are:

  1. Thinking that your company is out of the Workers Comp system.
  2. Still acting like a non-self-insured.
  3. Thinking large deductible policies do not have E-Mods
  4. Not properly preparing your RFPs for TPAs
  5. Not considering other types of WC coverage
  6. Not having an LDF calculated each year.
Picture of Self Insurance Program Hand Showing Money Growing On a Tree


1.  This is probably the most costly mistake of all with self-insurance.  Regular insurance policies have a buffer area better known as the E-Mod.  If your company has a large number of claims in one policy year, the E-Mod system will spread out the risk over time – usually three to four years.

If your company is self-insured, you are responsible for the immediate direct payment of the indemnity and medical benefits.   There is no buffer area to spread the risk over in case of a very bad year as with regular WC insurance.

Safety is tantamount when your company is self-insured.  Your company has a very close fiduciary relationship with your TPA as they are spending directly out of your company’s budget or bank account.

Your company still has an E-Mod.  LDFs are a self-insured’s E-Mods of sorts. See mistake #6 in tomorrow’s article for a further discussion of LDFs.

Stressful Woman Using Laptop

2.  Employers sometimes set up a self insurance program and then go right back to operating their WC program as if they were a regular insured.   Many actions must be undertaken such as, for example, changes in the safety program, more loss run reviews, and choosing certain medical networks.

The work has just begun when changing to a self insurance program.  The new endeavor may save a large amount of company funds.  The management of the program will be the main determinant of its success.   One area where we often see deficiencies is in Risk Management staffing.  Your company has more funds on the line.  Safety and risk management are critical to your success.   The risk management staff will also be the conduit for communicating with upper management on the self insurance program.

3. Large deductible programs are quasi-self insurance programs.  One of the more astounding lessons I learned very early on in my career was that large deductible programs have an E-Mod calculated every year.  The other major lesson was that a large number of large deductible insureds have been told they will have no E-Mod calculated like a regular insurance program and will operate outside the E-Mod system.

If your program is a large deductible, you can check your E-Mod online with your rating bureau or request a copy of your E-Mod by mail.

4. One of the unfortunate ways to start a self insurance program is with a bad Request For Proposal to acquire Third Party Administrator services for your company.  As I pointed out earlier in this article, the TPA will be spending directly out of your company’s bank account. One might think of a TPA as a bank of sorts.  TPAs should be viewed as internal employees.  You are giving the TPA a blank check to write every business day.

Sketchpad Erasure Self Insurance And White Eraser

Most TPAs’ services are generally generic.  The value-added services are the area where employers spend the most $$$. The best place for estimating the cost of these services such as rehabilitation nurses, bill review, and medical networks, is by structuring your TPA RFP to your best possible advantage. It is time to look at the trees and then look at the forest.

We see so many self-insureds construct a good TPA RFP and then sign off on an agreement that includes terms that are to the TPA’s advantage.   RFPs can end up being a very large money waster for a self-insured.

5.  When a company starts to grow, the self-insurance fever takes them over very quickly.  Self-insurance is the cheapest route for many employers.  Many other types of insurance may suffice for a growing company for Workers Comp coverage.

This is especially true if your self insurance program has been hit with a spate of lost time accidents.  Self-insureds that are experiencing shrinkage due to successive recessions may find the budget not large enough to spend out direct funds without the E-Mod buffer.  There is nothing wrong with going back to a regular insurance policy when conditions warrant such a move.

6.  There is a five-minute conversation that I can have with a self-insured to see if they are properly managing their WC interests.   The very first question I ask is ” Have you had your LDF (Loss Development Factor) calculated for your upcoming budget year?”   If the answer is no, then I equate their self insurance program to driving in an unfamiliar place without directions.

Angry Man Self Insurance Program Scolding Woman Assitant

The LDF is a self-insureds E-mod of sorts.  I have always considered LDFs to be superior to E-Mods as a longer Experience Period is examined.  I have calculated numerous LDFs over the years for clients.  I always like to do a synthetic E-Mod also as a way to look at the short-run budget.  The LDF is more of a longer-term budgetary enhancement.

There are many LDF software packages on the market.  The one area to avoid is GIGO (Garbage In Garbage Out).  The input numbers have to be applicable to have a good LDF estimation.  Three different people can easily come up with varying LDFs given the same data for examination.

There are many more mistakes that an employer can easily make with self-insurance.   These six seem to have the largest impact on a self insureds company’s budget.

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James J Moore - Workers Comp Expert

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Management Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
  • LinkedIn, Twitter, Facebook and other social media sites
  • Various trade publications


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