Professional Employer Organizations (PEOs) assist small and medium businesses in managing their operational processes and costs. However, workers’ compensation policies for PEOs are generally complex and involve multi-state programs, making it challenging and potentially costly. To better control costs related to predictable claims, many PEOs are opting to self-insure where permitted.
What is self-insurance?
Self-insurance is a strategy in which a PEO assumes financial responsibility for claims instead of purchasing traditional insurance. This approach involves maintaining a dedicated reserve fund to cover employee injuries.
Why self-insurance works well for PEOs
- Lower costs: eliminates the need to pay for insurance company profits.
- Better control: Directly handling claims accelerates responses and improves results.
- Tailored solutions: PEOs can design safety programs that fit their clients exactly.
Why excess coverage matters
While self-insurance allows companies to manage their own claims and retain control over their workers’ compensation programs, it also exposes them to significant risks. Obtaining excess workers’ compensation coverage, or stop-loss insurance, is crucial for safeguarding against large or catastrophic claims. In the event of a severe workplace injury or illness, costs associated with medical treatment, rehabilitation, and lost wages can escalate quickly. Excess coverage kicks in once the self-insured retention limit (the threshold amount the company is responsible for) is exceeded, providing financial protection against these high-cost claims. There are two common types of excess coverage:
- Specific excess coverage: Covers single large claims exceeding a certain limit.
- Aggregate excess coverage: Covers total claims for the year once they surpass a set amount.
Key steps for successful self-insurance
- Strong financials: PEOs must maintain sufficient funds to meet state reserve requirements and pay claims easily.
- Effective claims management: Employ skilled claims managers or third-party teams to handle injuries quickly.
- Compliance with legal requirements: Each state where you self-insure have distinct requirements that must be met before obtaining a self-insured license. Understanding and complying with these regulations is essential to avoid penalties.
- Commitment to safety: Regular safety training and process improvements help to minimize injuries and reduce costs.
Why PEOs choose self-insurance
Cost control and savings: By assuming financial responsibility for workers’ compensation claims, PEOs can avoid the high premiums associated with traditional insurance policies. Funds can be allocated to a dedicated reserve that covers claims as they arise, leading to substantial savings over time.
Enhanced control over claims management: Self-insured PEOs can implement their own claims management strategies, ensuring that claims are processed quickly and effectively. This level of control can lead to improved outcomes for injured employees and a more streamlined process overall.
Predictable cash flow: Self-insurance allows PEOs to pay claims as they happen, spreading costs over time and avoiding substantial upfront payment in the form of traditional premium and collateral. This also helps avoid market-driven premium fluctuations, leading to more predictable costs.
Improved employee relations and satisfaction: Self-insurance enables PEOs to create a more personalized approach to employee care. By managing claims in-house, PEOs can ensure that injured employees receive timely medical attention and support throughout their recovery process, creating a positive workplace culture.
Peace of mind: Excess workers’ compensation coverage provides a safety net for catastrophic claims, allowing businesses to focus on their core operations without the fear of potential financial ruin from a single large claim.
Is self-insurance right for your PEO?
Self-insurance can offer significant savings and control over workers’ comp claims, especially for PEOs familiar with large deductible program structures. To qualify for a self-insured license, you must demonstrate strong financials, exemplary safety practices, and clear claims management processes. Purchasing excess coverage is important to protect against catastrophic claims.
At Marsh McLennan Agency (MMA), we understand PEOs and can help set up the best program to fit your needs and goals. For more information, please reach out to one of MMA’s experienced insurance brokers.
