Books by Karin A Fleischhaker-Griffin
As a large corporation, there are many considerations to be made before electing to self-insure Workers' Compensation
As a large corporation, you may be considering establishing a fund to provide for the reimbursement of losses. Your corporation will be acting as your own insurance company for which you will be incurring many of the same expenses as a traditional insurer.
Workers’ Compensation losses generally occur with greater frequency than other lines of insurance and the total dollar amount of a claim is more predictable for larger firms. Being a Self-insurer would allow the opportunity of establishing a sound actuarial basis for payments to a self insurance fund and a small percentage savings of a dollar amount of workers compensation premium can add up to significant results.
CRITERIA TO CONSIDER:
1) Is your corporate financial strength sufficient enough to absorb the costs of the worst possible claims-year without a serious financial strain?
2) Is your claims volume of sufficient size so that the additional costs of a formal self-insurance program (Excess Insurance and Service Company fess) are not out of line with the cost of conventional Workers’ Compensation Insurance.
A. Administrative costs: (Part of the Insurer’s Premium Dollar)
1. State Premium Tax Expense - Premium tax expense will include only that amount which is a direct assessment for the expense of operating the Workers’ Compensation Administrative Authority.
2. Loss Adjustment Expense may be reduced through tighter controls.
3. Acquisition Expenses are eliminated (The cost of placing a risk on the books; includes but is not limited to a producer’s commission, field office operations and advertising)
4. General Expenses – those expenses incurred by an insurer for Workers Compensation Bureau membership, insurer home office expense, etc., would not apply.
5. Profit - This insurer expense is totally eliminated if you act as a self-insurer.
A. CLAIMS EXPENSE (The key to any successful self-insurance program).
1. Effective claims administration that is at least equal to the quality of service provided by Insurers. If not, self-insurance may not be a viable option for you.
a. An aggressive claims management philosophy is required including pre- and post-claim reviews and resource utilization guidelines for positive results.
1) Employees may be more inclined to work with you, together with physicians, to establish a proper cost-effective treatment plan.
a) Possible elimination of unnecessary expenses attributed to extra days in the hospital or non-essential medical procedures will directly benefit your firm in reduced costs and eliminate some of the stress on the injured employee.
2. Your involvement in the process may help establish a harmonious relationship with physicians and employees. Important dollars may be saved when determining the degree of disability. Employee morale may be boosted by your involvement in the process.
3. Utilizing your own first-aid infirmary or other medical facilities has built-in cost savings whether or not you are self-insured. Dependent upon the circumstances of whether the medical practitioners are independent contractors or employees, if the latter, you not only will be required to include your medical staff under your self-insured Workers’ Compensation program but also be required to secure medical professional liability insurance.
4. Insurers are also concerned with cost containment but as a self-insurer, your commitment to claims management will probably be stronger, more immediate and more effective.
B. PERSONNEL MANAGEMENT
1. A self insurance program may fit naturally into your personnel management program. It may allow for a closer relationship with you and an injured employee, with less paperwork and negotiations with a third party, with a more cooperative attitude toward conflict resolution.
C. LOSS PREVENTION AWARENESS
1. You may design your own accident recording procedures to determine where accidents occur, what job duties are most accident-prone in your facilities and what type of injuries are common. If set up in advance, your Workers’ Compensation Insurer will also provide such accident recording procedures to assist you in loss control procedures.
2. Along with the knowledge of how an accident reduction program can affect your costs, line supervisors may be more aware of safety considerations on a day-to-day basis.
THE POSSIBLE DISADVANTAGES:
A. Administration costs
1. The establishment of tighter controls may be costly and time consuming.
2. The savings in acquisition and general expenses are more than offset by fees charged by an outside administrator. Any reduction in the administration expenses, however, will lead to significant savings.
3. Lack of a third party impersonal claims administrator. There may be discomfort of an employee ion providing all information to an employer.
4. Employers may feel pressured to “look out for their own” and award higher benefits than those which are necessarily due or may undertake a “hard-nosed” attitude, alienating a portion of the workforce.
SERVICES YOU MAY NEED:
A. A determination of the costs that will be incurred for the following must be considered.
1. Administration and Loss adjustment expense
2. State fees and assessments for:
a. A STATE SECOND INJURY FUND which is designed to provide assurance to prospective employers that their liabilities will be limited in the event of further injury to employees with prior physical or mental impairments and thereby to encourage employment of the physically or mentally challenged.
1) Remember only injured workers who meet the Americans with Disabilities Act of 1990 will be considered disabled under the act, regardless of whether they satisfy criteria for receiving benefits under Workers’ Compensation. Work-related injuries usually cause temporary impairments which heal within a short period of time with little or no long-term or permanent injuries. Since work-related injuries do not always cause physical or mental impairments severe enough to substantially limit a major life activity, many injured workers who qualify for benefits under Workers’ Compensation may not be protected by the act. You must consider work-related injuries on a case-by-case basis to know if an employee may be protected under the Americans with Disabilities Act.
2) Medical information and records concerning employees and applicants who have been provided a conditional job offer may be submitted to the State Workers’ Compensation offices and Second Injury Funds without violating the terms of Americans with Disabilities Act.
b. UNINSURED EMPLOYERS FUND – to provide certain and immediate workers compensation benefits to workers injured while in the employment of employers who fail to insure or legally self-insure.
c. BENEFIT ADJUSTMENT FUNDS – used to provide payment for periodic adjustment in benefits to reflect increased living costs.
d. REHABILITATION FUNDS – to pay additional compensation to incapacitated workers engaged in an approved rehabilitation program.
e. INDUSTRY ACCIDENT COMMISSION or WORKERS COMPENSATION BUREAU ACTIVITIES.
3. Compilation and reporting of statistics
4. Loss Prevention Engineering and Training expenses
5. Premiums for Excess Insurance or Reinsurance.
a. Every employer authorized to self-insure its Workers’ Compensation’ liability in those states allowing a self-insured program are required to purchase reinsurance coverage. The re-insurer reimburses members for individual claims payments exceeding the member’s chosen retention limit and may provide reinsurance payments for all losses combined that exceed a specific level of total retention for all claims.
b. Because of recent terrorism and natural disasters, re-insurers have been hit with substantial losses. As a result, not only are there fewer re-insurers but the costs for such excess insurance may be extremely costly.
6. Premiums for Bonds–The principal purpose of the surety bond is to continue the timely payment of benefits while other more permanent steps are taken to overcome the self-insurer’s financial difficulties.
7. Legal costs for representation in claims hearings and appeals, state filings and subrogation proceedings.
8. Agency or Service Company fees for the administration of your program.
9. Medical and rehabilitation services.
WHAT SHOULD BE CONSIDERED WHEN MAKING A DECISION ON A SERVICE COMPANY?
1. Do I chose an insurer who may “unbundled” various aspects of their functions or an organization that provides only the services required (with the loss payments handled by you as they occur)?
2. Will the service company advise me as to whom and how much to pay and will they have draft authority?
3. Is the service company strong in their administration and claims investigation and handling, statistical reporting and cost of services?
a. Administration should include filing necessary reports with the state, projection of disability ratings, the investigation evaluation and adjustment of claims.
b. Preparation of claims for formal hearings, establishing reserves, exercising any rights you may have for the recovery of funds from a third party and assistance with the rehabilitation of any seriously injured employees should be provided.
4. Check the reserving practices of any potential service company. Howe often will outstanding claims be reviewed for proper reserving? (When you are provided Workers Compensation Insurance by an Insurer, your Agency representative usually provides these services for you by working in conjunction with the insurer).
a. Under-reserving has been the downfall of many insurance companies.
b. A self-insurer may incur greater liabilities than the established reserves indicate.
c. Over-reserving carries negative tax considerations. Reserves established for self-insurance programs are not usually deductible (like insurance premiums are).
d. Will I receive periodic reports showing details of each claim including a summary of its causes and costs?
e. Will the report be by location, department and cause to assist in Loss Prevention activities? Will the reports show the amounts paid and the reserve estimates?
5. What types of fees will be charged?
a. A percentage of a standard compensation premium?
b. Charges on frequency of claims, payroll or losses paid?
c. Concern is whether the service company has sufficient economic incentive to fulfill its obligations without requiring the regulator to take legal action against it. Does it have incentive to continue servicing claims after self-insurance ceases? Do they reserve money to facilitate claims handling to the claim conclusion? Many Workers’ Compensation Claims require servicing for a number of years after the year of occurrence. Make certain adjustment will be made to the final conclusion.
6. Should a service company be required to have an office within the state and to maintain records at that location sufficient to verify the accuracy and completion of all submitted reports?
a. Service staff and records should be available so that examinations can be conducted efficiently. Are your questions answered readily?
b. A higher level of service may be provided if the service company is located within the state in which benefits are to be provided. Or, is there a higher level of service with an out-state service company which has developed a centralized data processing facility?
7. How will claims services be handled if one service company is replaced by another service company? …… Or, if a service company is going out of business?
8. Should a service company post a surety bond to secure the performance of its obligations under its service contract with you?
9. Secure a full description of the service company’s facilities.
10. Find out how your account will be handled.
11. Ask for a representative client list?
12. Ask for resumes of the individuals who will handle your account?
13. Secure competitive quotes as to service and cost.
14. Does the Service Company have a strong knowledge and background with respect to Workers’ Compensation Law?
If Self-insurance is not for you and you have an ability to lower your loss costs by a Loss Control Program facilitated by an insurer, you may consider a Retrospective Rating plan. Retrospective Rating is a method of determining the premium for insurance AFTER the policy has expired and the loss costs under the policy have actually been determined. Retrospective means looking backward. (A new section will be provided soon on Retrospective rating).
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