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Self-insuring workers comp

Interest is rising

By Michael J. Moody, MBA, ARM

Workers compensation coverage is unique among other lines of commercial insurance. It is, for the most part, one of the only true "no fault" lines of coverage in the commercial market. It is designed to provide employees with medical and wage replacement protection in the event of an on-the-job accident, regardless of fault.

It is also one of the few lines of coverage, due to the size of the exposure base, that can be a viable candidate for self-insuring. Self-insuring work comp has become, over the years, an acceptable risk-funding approach. Many large employers have sufficient size so that they can consider self-insuring alone, while smaller employers can band together via a self-insured group (SIG) program to gain the advantages of self-insuring.

Numerous advantages

The concept of self-insuring has been around many years and, at this point, most individual states have specific statutes that allow employers to take advantage of self-insurance. However, employers must first apply to the state for approval and then be granted the privilege to self-insure. Advantages of self-insuring can be placed in two broad categories, according to Steve Luebbert, executive vice president for Safety National Insurance Company. Safety National is a specialty underwriter and the leading provider of excess work comp coverage in the nation.

Luebbert notes that the first group of advantages revolves around the financial impact of retaining risks. He says, "When employers reach a certain size, they begin to consider moving some of this risk internally." He indicates that once employers have established formal pre-loss and post-loss programs, they are more willing to assume some of their own risks. In these cases, he says, the major advantage of self-insuring is to lower the fixed cost component, thus "drawing good value from the self-insured transaction." Universally, Luebbert notes, many employers say, "We want to manage work comp, just like we manage the rest of our business."

The second major category of advantages deals with control issues surrounding the retention of risks. Luebbert points out that when employers purchase guaranteed cost products, for the most part, they also transfer all control over to the insurance carrier. Luebbert concedes that in some situations, such as very soft insurance markets, there may be a financial value to a guaranteed cost product. However, in Luebbert's experience, most employers want some degree of control, particularly over the claims process. "It's not just about lowering the cost, but maintaining the culture as well."

Best practices

With 70 plus years of experience as a leading writer of excess work comp, Safety National has a unique perspective point on how self-insured programs work. "The good news here," according to Luebbert, is that "self-insured groups still work." While the trade press has been zeroing in on several group programs that have been forced out of business, Luebbert believes that, "well-managed, well-regulated SIGs are still very viable approaches for small employers." And he goes on to point out that while the failures are making the headlines, the vast majority of SIGs perform exactly as they were expected to and continue to provide a practical alternative for small employers.

A review of Safety National's book of excess work comp business shows that successful accounts share a number of common traits. Out of this review grew a report detailing the best practices for self-insured groups. The report outlines five major areas where SIGs can implement best practices that will ensure their long-term success. These five areas are:

• Maintain a strong, proactive plan of operation—SIGs are dynamic creations that must function in a rapidly changing world. As such they "should consider annually evaluating the plan of operation to ensure it still meets the positive reasons and purposes for which it was created." A detailed review of the original feasibility study should be undertaken. Also a review of the marketing plan should be included to make certain that "the group continues to attract new members."

• Working with service providers—SIGs must use appropriate standards of experience and performance when selecting service providers. The group must make certain that any service providers are acceptable to regulators prior to signing any contracts. SIGs must develop basic standards of performance so that the "group's internal assessment or audit committee may be considered in determining if the service provider's performance has been or will be satisfactory." When reviewing service providers, SIGs should be sure to review quality of performance, core competencies, conflicts of interests and general value.

• Building relationships with regulators—SIGs need to "foster a relationship with appropriate regulatory authorities, so that an open dialogue may be developed." In most situations, just one meeting a year with the regulator at his or her office is not sufficient. Safety National suggests that SIGs "consider finding other means to interact with regulators." These can include such things as being active in the state self-insurance association, attending conferences sponsored by the regulator, and serving on subcommittees for self-insureds or providing public comments where appropriate. It is more important than ever that SIGs find positive ways to interact with regulators.

• Maintain financial solvency—Today's economic conditions demand that SIGs maintain adequate financial resources to meet or exceed any solvency requirements. While most states require that financial exams be conducted only every three years, best practices indicate that a thorough financial review be completed annually to determine the overall condition of the SIG. Minimum capital requirements must be available at all times. Additionally, actuarial assumptions must be tested to determine if they remain valid. In order to properly determine this, all exhibits to the annual actuarial report must be completely understood. Safety National recommends as a best practice that "all groups at least evaluate risk margins or confidence levels for projected losses before determining liabilities for outstanding losses and funding."

• Promote a "best practice" approach—"By establishing best practice strategies and standards, a self-insured group can distinguish itself in a positive way in the workers compensation marketplace." By following and articulating their best practice strategies, a SIG can differentiate itself, not only from the work comp writers in a state but also other SIGs that may be operating in the state. Long-term this "represents quality, loyalty and success for a self-insured group."


To be certain, gaining and maintaining a self-insured program is more difficult today than it has been in the past. Luebbert points out that while there are a number of issues, none is more important than financial security. "Lots of decisions today turn on this issue," he says. Concern within the industry is very high that adequate collateral is available and, with affordability and availability issues both being problems, this concern is bound to have an effect for the foreseeable future.

Luebbert also notes that with a hardening market waiting in the wings, many mid-sized agents and brokers will be looking for viable alternatives to the conventional work comp market, including self-insurance. While Safety National is there to assist in providing a viable alternative approach, it is important, says Luebbert, that the "broker really understands the exposures when self-insuring workers compensation risks." He adds, "The broker must completely understand the advantages of self-insurance." All too often, he says, "it is far easier to just sell against self-insurance." But he doubts that in many situations that may be the best course of action for the insured.

Luebbert's advice to agents and brokers is to start to learn and understand the self-insurance advantages, and then see how to take advantage of them during the upcoming hardening market conditions. Overall, he says, "SIGs are doing very well and that is news that is rarely talked about."


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