Nervous about the hard market and your Workers’ Compensation (WC) rates? Self-insurance is a type of loss sensitive program than can help you manage and fund your WC risk.
Core elements of a self-insurance program
Self-insurance is a financial arrangement in which a business keeps records of its losses and maintains a formal system to pay for them. It’s a good fit for organizations that have a tolerance for retaining risk and a willingness to devote capital and resources to financing and administering a self-insurance program. Frequently, a self-insurance plan is combined with a plan that transfers risk to an insurance carrier above a certain threshold (retention). Many states require a self-insured organization to purchase excess insurance.
Administration of a self-insurance program requires extensive resources devoted towards claim adjustment, loss reserving, record keeping and litigation management. Commonly, organizations on a self-insurance program will enlist the services of a Third Party Administrator (TPA) to assist in this administration. Beyond claims administration, self-insurance also requires that an organization meet qualifications of the state(s) in which it seeks to self-insure loss exposures and make regulatory filings to such state(s).
Picking green
Compared with a traditional insurance program, self-insurance programs provide several advantages, including:
- Control over claims. An organization can exercise direct control over the adjustment of its claims.
- Risk control. When an organization directly pays the cost of its own losses, it has an incentive to prevent and reduce them through risk control.
- Long-term cost savings. Long-term costs tend to be lower than the cost to transfer risk to an insurance carrier.
- Cash flow benefits. Cash flow is generated by retaining losses that are paid over a period of time, rather than paying the upfront cost of insurance.
Recipe for success?
Contact a Marsh McLennan Agency (MMA) advisor to see if a self-insurance program is the right hard market strategy for your business.
