Self-Insured In California: What You Need To Know

In California, self-insurance is an alternative to purchasing a workers' compensation insurance policy from an insurance company. Instead of paying premiums to an insurance company, self-insured employers are responsible for paying claims directly to employees who are injured or become ill due to work-related activities. To become self-insured in California, employers must apply to the Office of Self-Insurance Plans (OSIP) for approval. The approval process can take up to 30 days, during which OSIP evaluates the employer's financial strength, proposed benefit delivery system, and suitability to participate in self-insurance. Employers must meet specific financial requirements, including demonstrating financial stability and maintaining reserves to cover potential claims.

Application process for self-insurance

To become self-insured in California, employers must complete an application process with the California Office of Self-Insurance Plans (OSIP). This process typically takes 21 days and involves an evaluation of the employer's financial strength, proposed benefit delivery system, and suitability to participate in self-insurance.

• Submission of Application Form: Employers must complete and submit the appropriate application form to OSIP. The specific form depends on whether the employer is a private entity (Form A-1) or a public agency (Form A-2).
• Demonstrating Business Operation History: Applicants must provide evidence of at least three years of continuous business operation in a legally authorized business form. This requirement ensures that the employer has a stable and established presence in the market.
• Financial Statements: Employers are required to submit three years of certified, independently audited financial statements. These statements help assess the financial health and stability of the business.
• Credit Rating: Maintaining an acceptable business credit rating for at least three years prior to the application is essential. This demonstrates the employer's ability to manage financial obligations effectively.
• Evaluation by OSIP: During the 21-day application process, OSIP conducts a thorough evaluation. They assess the employer's financial strength, including reviewing financial statements and credit ratings. They also examine the proposed benefit delivery system to ensure it aligns with the requirements for self-insurance. Additionally, OSIP evaluates the employer's suitability to participate in self-insurance, considering factors such as the effectiveness of their injury and illness prevention programs.
• Approval by the Director: After OSIP's evaluation, final approval for self-insured status is granted by the Director of the Department of Industrial Relations.

It is important to note that each subsidiary or affiliate company within a private organization must file a separate application to become self-insured. They have the option to apply with the parent company or individually.

Financial requirements for self-insurance

To become self-insured in California, employers must meet certain financial requirements. These include demonstrating financial stability and maintaining reserves to cover potential claims.

The financial requirements for self-insurance in California are as follows:

• At least three years of continuous business operation.
• Three years of certified, independently audited financial statements.
• An acceptable business credit rating for the three full calendar years prior to application.

Additionally, employers must be able to demonstrate that they have sufficient assets and insurance to cover their employees' work-related injuries and illnesses. This includes maintaining reserves to cover potential claims.

The success of a self-insured workers' compensation program is often dependent on the effectiveness of loss control activities and claims management. Self-insured employers are responsible for managing the claims process, which can be complex and time-consuming. They must also ensure prompt and proper payment of benefits to injured workers.

To maintain self-insured status, employers must also meet specified annual obligations, including submitting an actuarial study, an employer's annual report, and audited financial statements to the Office of Self-Insurance Plans (OSIP).

Benefits of self-insurance

Self-insurance in California provides employers with certain advantages in workers' compensation coverage. Here are the benefits of self-insurance:

Cost Savings

By self-insuring, employers can eliminate insurance company overhead costs, which can significantly reduce premiums. Self-insured employers may also be able to deduct 100% of health insurance premiums they pay for themselves, their dependents, and their spouses, up to set limits.

Control Over Claims Process

Self-insurance allows employers to have more control over the claims process, which can lead to faster resolution and cost containment. Self-insured employers are not dependent on insurance companies to process and approve claims, giving them greater autonomy in managing their employees' compensation.

Flexibility in Choosing Healthcare Providers

Self-insured employers may have increased flexibility in choosing healthcare providers and treatment options for their employees. They are not limited to a specific network of providers and can make decisions based on the specific needs of their employees.

Safety and Loss Control Management

Self-insurance can lead to increased focus on safety and loss control management within the organization. By being directly responsible for the financial implications of claims, employers may be incentivized to implement effective safety measures and loss control activities, reducing the overall number of claims.

Claims Supervision

Self-insurance allows employers to supervise and manage the claims process directly. This can help ensure that benefits are promptly and properly paid to injured workers, providing better support for employees during challenging times.

While self-insurance offers these benefits, it is important to consider the disadvantages as well, such as the increased financial risk and the time-consuming nature of managing the claims process.

Disadvantages of self-insurance

Self-insurance in California can provide employers with certain advantages in workers' compensation coverage. However, there are several disadvantages to self-insurance that businesses should be aware of before making a decision.

One of the main disadvantages of self-insurance is the financial risk it poses. Self-insured employers are at greater risk of financial losses in the event of large or unexpected claims. If the funds set aside for self-insurance are insufficient, large claims can be financially devastating. Self-insured entities have no risk diversification to stabilize losses and are more exposed to volatility. According to a study by the U.S National Association of Insurance Commissioners, only 6% of self-insured businesses report claims of over $100,000. This highlights the potential financial burden that self-insurance can bring, especially for smaller organizations that may not have the financial resources to cover significant losses.

Another disadvantage is the administrative burden that comes with self-insurance. Self-insured employers are responsible for managing the complex and time-consuming claims process, which requires expertise and dedicated resources. This includes managing policy wording, risk management, claims handling, and financial management. Small organizations may struggle to effectively handle these additional responsibilities, making self-insurance less feasible for them.

Self-insurance is also subject to greater regulatory scrutiny and increased reporting requirements. This adds to the overall complexity and administrative burden of self-insurance.

Furthermore, self-insurance lacks the benefit of risk pooling, which is a key principle of traditional insurance. Risk pooling reduces the financial impact on individuals by spreading risks across a large number of policyholders. In contrast, self-insured individuals bear the full cost of losses or liabilities, leaving them vulnerable to catastrophic events that could deplete their resources.

Lastly, self-insurance inherently has limitations in terms of coverage. Traditional insurance policies often provide comprehensive coverage for a wide range of risks, including property damage, liability claims, and medical expenses. Self-insured individuals may overlook certain risks or underestimate their impact, leaving them exposed to unforeseen expenses that may be difficult to manage.

In conclusion, while self-insurance can offer cost savings and increased control over the claims process, it also carries significant financial risks, administrative burdens, and the potential for unforeseen losses. Businesses considering self-insurance must carefully evaluate these disadvantages and consult with insurance professionals to determine if it is a feasible option for their organization.

Annual reporting requirements for self-insured employers

Self-insured employers in California are subject to annual reporting requirements. The California Office of Self-Insurance Plans (OSIP) requires self-insured employers to submit an annual report, which is essential for monitoring and ensuring that these employers are adequately fulfilling their obligations under the state’s workers’ compensation laws. This report must be submitted by a specific deadline and should provide detailed information regarding the company’s workers’ compensation claims and financial status.

There are four key issues that must be addressed in a self-insured employer’s annual OSIP report:

• Employee and Wage Information: The annual report should include detailed information about the employees, such as the total number of employees, the classification of their jobs, and the total wages paid.
• Claim Paid (Medical and Indemnity): A comprehensive list of all the workers’ compensation claims that were paid during the reporting period, including the number of claims, the amount paid for each claim, and the total amount paid in claims.
• List of All Open Claims: A list of all open claims, including any claims that have not yet been settled or closed, along with information on the status of these claims and any actions being taken to resolve them.
• Future Liability (Open Claims): An estimation of the amounts that the company expects to pay in the future regarding open claims.

In addition to the annual report, self-insurers are also required to annually submit to OSIP an actuarial study and a copy of their audited financial statements. The actuarial study determines the ultimate exposure of the self-insurer’s workers’ compensation liabilities, while the audited financial statements are used to determine minimum financial eligibility to be self-insured.

Frequently asked questions