To call the traditional insurance market turbulent in 2023 would be an understatement. The United States insurance market has hardened due to numerous risks, including those associated with cybersecurity, cut-throat competition, evolving customer expectations, and climate change.
Companies that operate in industries like logistics, construction, manufacturing, etc., are looking for alternative options for workers’ compensation. Many are opting for the self-insurance option due to certain aspects inherent to the program, such as –
- Large claim payments are diversified over time, offering cash flow benefits to the employer.
- Generally, losses associated with workers’ compensation may be categorized as low-severity and high-volume. These translate into predictable loss forecasting.
- The statutory cap on lost wages introduces an element of certainty as far as loss severity is concerned.
Workers’ compensation is indeed suited for self-insurance. However, an employer may avail of it only after careful analysis of several factors. This decision must not be made in isolation because there are risks involved.
????Here Are Four Prime Factors Influencing The Decision To Self-Fund Workers’ Compensation
In this article, we will discuss the four key factors an employer must consider to ensure the success of their self-insured workers’ compensation.
1. Financial Feasibility
The first factor that must influence the decision to self-insure workers’ compensation is the organization’s financial position. A company with a strong cash flow is in a much better standing to introduce a self-insured program.
Guaranteed cost insurance has benefits in the sense that the employer can know the exact premium amount required for protection against losses. However, it is financial strength that will determine their ability to invest in such a program.
This is because the employer will be exposed to greater fluctuations in earnings when compared to other forms of insurance. Many states across the US have minimum net worth requirements for companies contemplating self-insured workers’ compensation. Failing to meet these requirements can lead to immediate disqualification.
2. Management Perspectives
Before an organization can establish a concrete self-insured workers’ compensation in place, it must check if its management is on the same page. In other words, all executives must be united in mind, accepting the risks involved and displaying a willingness to commit.
Self-insurance is a process of moving from known risk to unknown territory. It is crucial that the management is aware of the potential risks involved and wishes to commit to such a program long-term. Self-insurance cannot be used as a quick fix to bridge market conditions.
The employer must ensure all members of the management want to take on a proactive role in the claims process. After all, the self-insurance money will directly impact the organization’s financial bottom line.
3. Exposure and Operations Audit
A third factor that plays a key role in the self-insured workers’ compensation process is the assessment of an organization’s exposure and operations. For this, the respective state’s guidelines should help in knowing whether workers’ compensation programs are available and what kinds.
In such cases, the self-insured company can even buy an Excess insurance policy to limit individual claim costs. According to Prescient National, excess policies are only available for organizations approved by their state’s Department of Insurance for self-insurance.
Suppose an organization operates across multiple states. Here, the administrative costs will be higher since each state’s approval is needed to self-insure. In case some states do not allow self-insurance like Ohio or Wyoming, the company must make separate provisions through workers’ compensation insurance.
Furthermore, it is also important to ensure self-insurance finds favor in the sight of the stakeholders, customers, and business partners. There may be objections due to the unstable nature of expenses involved in this program. Only after a thorough audit is it wise to move forward with self-insured workers’ compensation.
4. Infrastructural Capabilities
Cost savings in a workers’ compensation program happen due to two reasons – low administrative costs for the program and low indemnity or medical payments to workers. This is precisely why an employer must review their company’s internal sources to know which components of the program need outsourcing.
In the case of self-insurance, the company must have access to a wide range of professional services otherwise provided by an insurer.
These include –
- Medical knowledge to process claims and negotiate with providers
- Sound legal judgment to cover litigated claims costs
- Actuarial assistance to predict future loss scenarios for the organization
- Loss control and safety programs under the charge of professionals like engineers
If possible, the organization can house a personal team for such affairs or use a combination of in-house personnel and outsourced services. One example would be third-party administrators who perform professional and administrative duties for a fee.
The above-mentioned factors are among the most important when it comes to deciding on the side of self-insured workers’ compensation. There are no hard-and-fast rules when it comes to moving from a traditional to a self-insured program.
If the company has reached a point when getting self-insured makes the most sense, it’s vital to evaluate such factors first. Then, it becomes possible to move forward with full assurance that the program will be a success.