Initial Considerations For Self-Insuring Workers' Compensation
(i) Awareness of Increased Administrative Responsibilities
These will increase if a company is self-insuring as the functions of the insurance company will still need to be replicated. Most of these responsibilities however can be outsourced to a service provider such as a third party administrator. These administrative tasks include maintaining loss records, filing reports with state authorities, working with service vendors and consultants. Monitoring the performance of all the component parts is critical to the success of the program and there always needs to be the highest level of support by senior management who also need to recognise the need to actively encourage claims and loss control programs. If handled correctly self-insurance can create a safer workplace with better employee morale and higher profits.
(ii) Awareness of Financial Risks
As the employer is responsible for the first part of any claim it now faces a financial risk however with careful structuring of the specific and aggregate policy this exposure can be controlled with a limited financial downside. Of course the price of the specific and aggregate coverage is subject to change however the cost is significantly less than standard workers compensation coverage, typically less than 15.00%, and the company should have an improved loss experience as a self-insurer.
(iii) Awareness of Legal Requirements
Each state has specific requirements that must be met before an employer can self-insure. These include posting a letter of credit or alternatively a surety bond from a surety provider to cover the company's own financial obligation as a result of the self-insured retention. In this way the injured worker is still protected should his employer go out of business.
(iv) Awareness of Tax Considerations
Generally whereas premiums under some insurance programs are tax deductible under a self-insured program only paid losses and expenses are deductible as opposed to reserves. In other words whilst a self-insurance program does not result in the loss of a tax deduction the employer needs to be aware than no credit can be taken until claims are actually paid.
(v) Awareness of the Need for a Long-Term Commitment
Whilst all the component parts of a self-insurance program are relatively easy to put together self-insurance should be viewed as a long-term commitment as it would be expensive and time consuming to move back and forth between conventional and self-insurance. In addition the true benefits of self-insurance are best judged over a period of time, as features such as loss control mechanisms will take some time to become established.
