Converting to Self Insurance – New Tasks To Accomplish
Converting to self insurance is a very popular option for many companies.
We receive many inquiries every year from employers that wish to cover to self insurance for their Workers Compensation coverage.
The inquiries to our offices reached a fever pitch in 2002 – 2005. Self insurance can save $$ for the right employer in the right situation. There are many considerations to analyze before converting to self-insurance.
Five of the top considerations are:
- Your company or organization will have a new partner with a very close fiduciary relationship. If you stop and think before you were just paying an insurance premium and letting the carrier handle the claims. You will have an outside company – Third Party Administrator (TPA) spending directly out of one of your bank accounts. In other words, the method you use to monitor the claims must change overnight.
- With self insurance, you lose the ability to absorb many claims or a few large claims. Unless your company or organization has a large insurance budget, this can severely impact your budget. The buffer of the insurance policy and the E-Mod system is no longer yours. Reinsurance may help to a certain degree.
- You have to calculate your own E-Mod better known as the Loss Development Factor (LDF). The outlook in the E-Mod system is up to four years in the past. LDF’s survey a 10-year period. Your LDF may not match your old E-Mod. If your organization is self insured and you do not know your LDF or have not had one calculated, your insurance budget is no more than a bad guess.
- The state requires certain minimums to be self-insured. There is a reason for these minimums. The minimums keep your company afloat if #2 above occurs in your insurance budget.
- There may be less expensive and risk-averse alternatives such as:
- Large deductible plans- are very popular with companies that want to retain some, but not all of their WC risk.
- PEOs – becoming very popular with mid-sized employers and companies with high E-Mods.
- Small deductibles-I have not seen a very significant amount of savings in these plans
- Captives – becoming more popular due to flexibility, they do carry a certain amount of unique risk
The #1 concern with an employer converting to self insurance is #2 from above. Congrats as your company are or have grown in a tough economy. Patience and risk diversity such as PEO’s are the keys. Even though your company may be in line to be self insured in the future, now may not be the best time.
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