A self-insured Workers’ Compensation plan (also known as a self-funded plan) is one in which the employer assumes the financial risk for providing Workers’ Compensation benefits to its employees. In practical terms, self-insured employers pay the cost of each claim “out of pocket” as they are incurred instead of paying a fixed premium to an insurance carrier or to a state-sponsored Workers’ Compensation fund. It is estimated that more than 6,000 corporations and their subsidiaries nationwide operate self-insured Workers’ Compensation programs. Many other employers participate in group self-insured Workers’ Compensation funds, where they pool together with other companies to self-insure their collective Workers’ Compensation risks.
A small number of states do not permit
employers to operate self-insured plans, forcing all companies to either buy commercial insurance or participate in the state fund. In all other states, companies must be approved by the applicable regulatory agency in order to operate a self-insured Workers’ Compensation plan. In order to be approved, companies typically need to meet certain solvency standards and provide appropriate actuarial reports.
Employers typically choose to self-insure their Workers’ Compensation plans because it gives them more opportunities to control costs and ensure their injured workers are receiving timely and proper care. Under a self-insured arrangement, employers also pay claims as they are incurred, as opposed to paying costs up front in the form of commercial insurance or a state fund policy. This “pay as you go” approach serves to maximize cash flow.
Since a self-insured employer assumes the risk for paying the Workers’ Compensation claim costs for its employees, it must have the financial resources (cash flow) to meet this obligation, which can be unpredictable. Therefore, small employers and other employers with poor cash flow may find that self-insurance is not a viable option. It should be noted, however, that there are many smaller companies that maintain viable self-insured Workers’ Compensation programs. While the largest employers have sufficient financial reserves to cover virtually any amount of Workers’ Compensation claim costs, most self-insured employers purchase what is known as excess insurance to reimburse them for claims above a specified dollar level.
Self-insured employers can either administer the claims in-house, or subcontract this service to a third party administrator (TPA). TPAs can also help employers set up their self-insured Workers’ Compensation plans and coordinate excess insurance coverage, provider network contracts and utilization review services.