Self insurance is when an employer pays their own workers’ compensation claims instead of buying a voluntary market policy.
The process involves a large employer qualifying to become self-insured.
Each state has its own specific laws on self insurance. Almost all states allow qualified companies to become self-insured.
The qualifications for paying claims directly out of an account are usually $500,000 in liquid assets per state; having reinsurance for catastrophic claims; possessing a security bond in case of company failure, and hiring a Third Party Administrator (TPA) to handle the claims.
A self-insured may handle the claims in-house without an outside TPA with state approval.
The respective states’ Department of Insurance is tasked with administering the programs.
If a self-insured company fails or files for bankruptcy, the cases will be handled by a Guaranty Association. These associations are funded by levies on each self-insured in the state.
During the 1990s many self-insured companies failed which caused a large transfer of claims to the Guaranty Associations. When claims are transferred to the Association, the claims may experience a long delay with proper handling.
The Risk Management for self insurance is quite different than a regular voluntary market policy. A Loss Development Factor (LDF) calculation is necessary to replace the E-Mod system with a regular Workers’ Comp insurance policy.
The LDF comes from actuarial projections of claims development for 10 years.
The risk manager must follow the claims closely. The TPA or in-house adjusters spend direct budgetary funds to pay the claims.
The self insurance Loss Run reviews become very critical for any budgetary concerns.
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