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Converting to Self Insurance – Five Important Considerations & Alternatives

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Converting to Self Insurance – New Tasks To Accomplish

Converting to self insurance is a very popular option for many companies.

Picture Of Hand Converting to Self Insurance With Plan And Coins
Wikimedia Commons – 401(K) 2012

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. There may be less expensive and risk-averse alternatives such as:
    • Gray Shield Converting to Self Insurance With dollar Icon
      StockUnlimited

      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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James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt 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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