Self-Insuring Workers Comp: A Guide For The Self-Employed

Self-insured workers' compensation, also known as self-funded workers' compensation, is a program that allows businesses to fund their own workers' compensation insurance. This means that employers pay for their workers' compensation claims out of pocket instead of paying an insurance premium to a third-party insurance company. While this option is not available in all states, it is a popular choice for many employers due to its cost-effectiveness, increased control over claims programs, and improved safety and loss control management. To become self-insured, employers must meet specific requirements, including demonstrating financial stability and maintaining reserves to cover potential claims.

Self-insurance vs. traditional insurance models

When it comes to workers' compensation, employers can choose between two structures: insured and self-insured. The insured route involves either a guaranteed cost (GC) or a large deductible (LD) program, while the self-insured option is qualified self-insured (QSI).

Insured Workers' Compensation

In a GC program, the insurer handles all aspects of the claims process and pays out benefits, with the employer paying a fixed premium. LD programs, meanwhile, involve the insured paying claims within a specific deductible, with the insurer reimbursing payments above the retention amount.

Self-Insured Workers' Compensation

Self-insured workers' compensation, or self-funded workers' compensation, is a program that allows businesses to fund their own workers' compensation insurance. This means that businesses pay for their own workers' comp claims out of pocket, eliminating the need for a third-party insurance company. This option provides greater control over claims and costs and is typically less expensive to administer than traditional insurance. It also allows employers to manage costs while providing excellent coverage for their employees.

However, self-insured workers' compensation requires adequate financial resources to fund the program and handle costly claims. It also requires specialized skills in areas such as medical and legal knowledge, negotiation, and risk management. Additionally, not all states allow self-insured workers' compensation, and those that do have stringent regulations and financial requirements that must be met.

Both insured and self-insured workers' compensation programs have their advantages and disadvantages. Insured programs offer the security of an insurer handling claims and benefits, while self-insured programs provide greater control and cost management. The right option for an employer will depend on their financial situation, risk tolerance, and the specific requirements of the state in which they operate.

Requirements for becoming self-insured

California

To become self-insured in California, employers must apply to the Office of Self-Insurance Plans (OSIP) for approval. The application process takes about 21 days, during which OSIP evaluates the applicant's financial strength, proposed benefit delivery system, and suitability to participate in self-insurance.

To be eligible for self-insurance in California, organisations must meet the following financial requirements:

• Three calendar years in business in a legally authorized business form.
• Three years of certified, independently audited financial statements.
• An acceptable credit rating for the three full calendar years prior to application.

Each subsidiary or affiliate company of a private applicant must file a separate application to become self-insured. They may apply with the parent company or individually.

Texas

In Texas, private employers can apply for a certificate of authority to self-insure workers' compensation under Texas Labor Code Chapter 407 and 28 Texas Administrative Code (TAC) Chapter 114. An approved private employer is called a certified self-insurer (CSI).

To become a CSI in Texas, a private employer must:

• Have an estimated unmodified manual insurance premium for workers’ compensation of at least $500,000 in Texas or at least $10,000,000 nationwide.
• Present audited financial statements.
• Have a qualifying financial rating:
• Dun & Bradstreet rating of 3A1 or better.
• Standard & Poor's rating of BBB or better.
• Moody's rating of Baa or better.
• A qualifying tangible net worth to long-term debt ratio of 1.5 to 1 or greater, with a minimum tangible net worth of $5 million.
• Post a security deposit of at least $300,000.
• Get excess insurance for at least $5 million per occurrence.
• Pay a non-refundable $1,000 application fee.

Advantages and disadvantages of self-insurance

Advantages of Self-Insurance

Self-insurance can provide several benefits for employers in the context of workers' compensation:

• Cost Savings: By eliminating insurance company overhead costs, self-insuring employers can significantly reduce premiums. This is because they no longer need to cover expenses such as staffing and administration for the insurance carrier.
• Improved Cash Flow: With a "pay as you go" approach, self-insurance frees up cash flow by avoiding the need to pay high premiums in advance of injury claims.
• Enhanced Control and Flexibility: Self-insurance allows employers to have greater control over the claims process, often leading to faster resolution and better cost containment. They also gain more flexibility in choosing healthcare providers and treatment options for their employees.
• Better Claims Management: Claims can be handled in-house or through a third-party administrator, providing more direct communication and management of industrial injury claims.
• Long-term Risk Management: Self-insured businesses are encouraged to analyze their risks and save money accordingly, preparing for potential claims over the long term rather than relying on short-term insurance policies.

Disadvantages of Self-Insurance

While self-insurance offers advantages, there are also several drawbacks and risks to consider:

• Financial Risk: Self-insured employers are more vulnerable to financial losses in the event of large or unexpected claims. A single large injury claim or excessive injury claims in a year can strain the company's finances.
• Administrative Burden: Self-insured employers are responsible for managing the complex and time-consuming claims process, requiring dedicated resources for claims management and related administrative tasks.
• Regulatory Scrutiny: Self-insurance is subject to increased regulatory scrutiny and reporting requirements, which can be burdensome for employers.
• Specialized Skills Needed: Managing self-insurance effectively may require specialized skills in areas such as medical and legal evaluation of claims, negotiation with care providers, and risk management to avoid excessive claims.
• Understanding Risk Exposure: One of the critical challenges for self-insured businesses is accurately assessing their exposure to risk. Failure to prepare and save adequately for potential claims can lead to insufficient funds to cover accidents.

How to administer self-insured claims

Administering self-insured workers' compensation claims requires careful management and a good understanding of the process. Here are some key steps and considerations for handling self-insured claims effectively:

Understanding the Basics

Firstly, it's important to understand the nature of self-insured workers' compensation. In this arrangement, the employer assumes the financial risk and pays for each claim out of pocket instead of paying a fixed premium to an insurance carrier. Self-insured employers have the option to administer claims in-house or subcontract the service to a third-party administrator (TPA).

Meeting Requirements

Before administering self-insured claims, employers must meet certain requirements. These requirements vary by state, but generally include demonstrating financial solvency, providing actuarial reports, and having sufficient cash reserves to handle employee injury claims. Some states may also mandate specific excess insurance coverage to limit the financial risk.

Handling Claims Administration

When it comes to claims administration, self-insured employers have two main options: in-house handling or using a TPA. In-house claims administration involves directly managing all aspects of the claims process, including evaluating and paying claims. This option requires specialized skills in medical and legal fields, negotiation, and risk management. Alternatively, a TPA can be contracted to handle claims administration and loss control services for an agreed-upon fee.

Complying with Regulations

Self-insured employers must comply with workers' compensation laws and regulations. This includes adhering to the requirements for posting relevant forms, authorizing medical care for injured workers, and meeting timelines for compensation payments. Proper documentation and record-keeping are essential to ensure compliance.

Managing Cash Flow

Self-insured workers' compensation impacts cash flow, as employers pay for claims as they are incurred. To manage this, self-insured employers can implement a "pay-as-you-go" approach, freeing up cash flow by avoiding high premiums in advance of injury claims. Additionally, excess insurance can be purchased to cover claims beyond a certain dollar amount, protecting against large or excessive injury claims.

Periodic Audits and Evaluations

Self-insured employers are subject to periodic audits and evaluations to ensure compliance and proper claims management. These audits may be conducted by the state's workers' compensation division or a similar entity to verify prompt and accurate payment of benefits to injured workers.

Regulatory requirements and scrutiny

Regulatory Requirements:

• Application Process: Employers seeking to become self-insured must apply to the Office of Self-Insurance Plans (OSIP) for approval. The application process evaluates financial strength, the proposed benefit delivery system, and suitability for self-insurance.
• Financial Criteria: To qualify for self-insurance, employers must meet specific financial requirements. This includes demonstrating at least three years of continuous business operation, providing three years of independently audited financial statements, and maintaining an acceptable credit rating for three years.
• Benefit Delivery: Self-insured employers are mandated to provide the same scope of benefits as an insurance company. Claims must be adjusted in specific locations, and new self-insurers are typically required to use a licensed third-party administrator for their initial three years.
• Reporting Obligations: Self-insured employers are subject to annual reporting requirements. They must submit an annual report to OSIP, including an actuarial study, the employer's annual report, and audited financial statements. This report monitors compliance with workers' compensation laws and details claims and financial status.
• Compliance with Laws: Both insurers and self-insurers are subject to audits by the Division of Workers' Compensation to ensure prompt and proper payment of benefits to injured workers. Self-insurers are also periodically audited by OSIP to verify the accuracy of claims reserving practices and the correctness of reported liabilities.

Scrutiny:

• Increased Regulatory Scrutiny: Self-insured employers face greater regulatory scrutiny, which includes enhanced reporting requirements. They are held to the same standards as traditional insurance carriers when it comes to claims handling and benefit delivery.
• Compliance Audits: Audits are conducted to verify compliance with applicable industrial insurance laws and regulations. These audits ensure that self-insured employers effectively manage workers' claims and adhere to established standards.
• Penalties for Non-Compliance: If employers or third-party administrators fail to follow rules and regulations, penalties may be issued. This reinforces the importance of self-insured employers maintaining rigorous compliance with the established regulations.
• Dispute Resolution: Self-Insurance Claims Management Sections play a role in resolving disputes and protests from workers, employers, and providers. They provide a mechanism for addressing disagreements and ensuring fair treatment for all parties involved.

The regulatory requirements and scrutiny surrounding self-insured workers' compensation are designed to protect the interests of both employers and employees. By meeting these standards, self-insured employers can effectively manage their workers' compensation liabilities while ensuring that injured workers receive the benefits they are entitled to.

Frequently asked questions