Workers' Comp: Self-Insured Or Carrier-Insured?

When it comes to workers' compensation, employers have a choice between two main structures: insured or self-insured. The insured route typically involves guaranteed cost (GC) or large deductible (LD) plans, where the employer purchases workers' compensation insurance from a traditional provider and pays fixed premiums, with the insurer handling all aspects of the claims process. On the other hand, self-insured workers' comp eliminates the third-party insurance company, with the employer paying out-of-pocket claim costs directly and assuming all financial risk. This option has gained popularity due to its potential for better cost controls and claims management, but it also requires specialized skills and adequate financial resources to handle large or excessive injury claims.

Characteristics of Self-Insured and Insured by Carrier Workers' Comp

Self-insured workers' comp plans free up cash flow

Self-insured workers' compensation plans can help free up cash flow for several reasons. Firstly, self-insured plans eliminate the need for third-party insurance companies, allowing employers to pay claim costs out of pocket as they are incurred, rather than paying high fixed premiums in advance to an insurance carrier or a state-sponsored fund. This "pay-as-you-go" approach maximises cash flow by avoiding the need to pay large sums upfront before any claims are made.

Self-insured plans also offer better cost controls, as they are typically less expensive to administer than those provided by traditional insurers. Employers have more opportunities to control and lower fixed costs, and they can ensure that their injured workers receive timely and proper care. Self-insured employers can administer claims in-house or subcontract this service to a third-party administrator (TPA), giving them greater flexibility and control over the claims process.

In addition, self-insured plans can help to improve cash flow by providing better claims management. Claims are handled in-house or by a TPA, allowing for more efficient and effective processing of claims. This can help to reduce the overall cost of claims and improve cash flow for the employer.

It is important to note that self-insured workers' compensation plans are not suitable for all employers. While they can provide significant benefits in terms of cash flow, they also come with financial risks. Self-insured employers assume the full financial risk of providing on-the-job benefits to their employees, and must have the financial resources to meet this obligation, which can be unpredictable. Small employers or those with poor cash flow may find that self-insurance is not a viable option due to the potential for large or excessive injury claims.

Insured workers' comp programs are guaranteed cost (GC)

Insured workers' compensation programs that are guaranteed cost (GC) are a common choice for small to midsize employers. In a GC program, the insurer pays all losses, and the employer pays a fixed premium. This is in contrast to large deductible (LD) programs, where the insured is responsible for claims within a specific deductible.

GC programs are fully insured, meaning the insurer pays out for all losses. The only qualification for a GC program is the ability to make premium payments. This is in contrast to LD programs, where the insurer determines the acceptable deductible amount based on the financial condition of the insured.

GC programs are also more straightforward when it comes to administrative expenses. The insurer is responsible for making state filings and paying assessments that are contained within the guaranteed cost premium. In LD programs, these administrative expenses are sometimes passed on to the insured.

When it comes to claims handling, the insurer in a GC program controls all vendor selection and claims handling decisions. In an LD program, the insured has more influence on claims handling decisions up to a specific claims retention amount.

GC programs do not require collateral, whereas LD programs do. The collateral is held by the carrier and is used to cover claims liabilities within the deductible amount.

Overall, GC programs offer a more hands-off approach for employers, as the insurer handles all losses, claims handling, and administrative tasks. LD programs, on the other hand, give the insured more control and influence over claims handling and other aspects of the program.

Self-insured workers' comp plans offer better claims management

Self-insured workers' compensation plans are becoming an increasingly popular option for businesses. In these plans, the employer assumes the financial risk and handles the claims process, including paying out benefits for employees injured in the workplace. This is in contrast to traditional insurance, where the employer pays fixed premiums to an insurer who then handles all aspects of the claims process.

Self-insured workers' comp plans offer several advantages, including better claims management. With self-insured plans, claims are handled in-house or by a third-party administrator. This gives employers more control over the claims process, allowing them to ensure their injured workers receive timely and proper care. The "pay as you go" approach of self-insured plans also helps to maximise cash flow.

Additionally, self-insured plans can provide better cost control, as they are typically less expensive to administer than traditional insurance plans. This is especially beneficial for large employers with the financial resources and stability to handle the unpredictability of workers' compensation claims. However, it is important to note that self-insurance may not be a viable option for smaller employers with poor cash flow.

While self-insured workers' comp plans offer greater control and flexibility, there are some potential drawbacks to consider. For example, self-insured businesses must have adequate financial resources to fund the program and cover any claims made by injured employees. To mitigate this risk, companies often purchase excess insurance to cover claims above a certain dollar amount.

Furthermore, self-insured businesses need to have specialised skills in areas such as medical and legal knowledge, negotiation, and risk management to effectively manage their plans. Working with a third-party administrator can help in this regard, as they can provide support and services similar to those offered by traditional insurance companies.

Overall, self-insured workers' comp plans offer better claims management and cost control, making them an attractive option for businesses seeking to manage overhead expenses and ensure their employees receive the care they need.

Insured workers' comp programs are large deductible (LD)

When it comes to workers' compensation programs, employers often evaluate the merits of two structures: insured or self-insured. Insured programs can be further divided into guaranteed cost (GC) or large deductible (LD) plans. This response will focus on the latter.

A large deductible plan is a cash flow workers' compensation insurance program. It allows the insured (the employer) to retain a portion of each loss through a substantial deductible and transfer losses exceeding that deductible to an insurer. The insurer handles all losses, billing back the costs for those below the deductible to the insured. The insured is responsible for claims within the specific claims deductible, while the carrier covers amounts above it.

In a large deductible plan, the insurer determines the acceptable deductible amount based on the financial condition of the insured. The insured must cover claims liabilities within the deductible amount with collateral, which is held by the carrier. The forms and amount of collateral vary by insurer, and it can be challenging to negotiate the amount.

Regarding claims administration, an insured employer with a large deductible plan has significant influence on claim-handling decisions up to the specific claims retention. Some insurers permit the insured to unbundle claims handling services and control other vendor selections. However, employers on a large deductible plan do not have the same level of control, influence, or knowledge of claim-specific issues as self-insured employers.

Large deductible plans have specific considerations for administrative expenses. The insurer is responsible for making appropriate state filings and paying assessments, which are usually contained within the fixed deductible premium. Sometimes, these administrative expenses are passed on to the insured. The insured is responsible for applications, certificates, and assessment payments. If assessments are loss-based, the insurer must estimate future assessments based on anticipated future claim payments.

Covered claims under a large deductible plan are subject to policy limits and are the responsibility of the insurer, excluding the retention amount. There is typically coverage for defence costs in disputed cases because the duty to indemnify is broader than the duty to defend. However, there may not be coverage for defence costs in employer liability claims, as they have different policy limits than workers' compensation claims.

The insured is responsible for claims within the specific claims deductible and must deposit the amount dictated by the carrier into the escrow account for paying claims. The carrier covers amounts exceeding the deductible. The insured pays all claims and seeks reimbursement from the excess insurer for payments above the specific claims retention.

Self-insured workers' comp plans are more flexible

Self-insured workers' compensation plans offer greater flexibility to employers in several ways. Firstly, they allow employers to free up cash flow by adopting a "pay as you go" approach, rather than paying high premiums in advance of injury claims. This approach can help manage overhead expenses, especially those related to employee benefits, which are often among the highest annual expenses for employers.

Secondly, self-insurance plans are typically less expensive to administer than those provided by traditional insurers, giving employers better cost control. They are subject to fewer regulations and offer businesses the opportunity to customize their plans to meet their unique needs. This flexibility extends to the benefits packages offered, which can be tailored to the company's specific requirements.

Additionally, self-insured plans offer better claims management. Claims are handled in-house or by a third-party administrator, allowing employers to maintain control over the process and make decisions that align with their interests. This includes handling diverse aspects of the plan, such as evaluating claims, negotiating with care providers, and managing risk and safety.

While self-insured workers' compensation plans offer these advantages, it is important to consider potential drawbacks. Self-insured plans require adequate financial resources to cover claims, and companies must ensure they have sufficient cash reserves to handle employee injury claims. To mitigate financial risks, companies may opt to purchase excess insurance to cover claims beyond a certain dollar amount.

In summary, self-insured workers' comp plans offer greater flexibility in terms of cash flow management, cost control, claims handling, and customization. However, it is essential for employers to carefully assess their financial capabilities and the potential risks associated with self-insurance before adopting this approach.

Frequently asked questions