Checklist: Self-Insuring Worker's Compensation?

A list of concerns to consider when looking into self-insurance.

• Self-insurance is not cost-effective for most employers.
• As a general rule, self-insurance is of no value if the modified standard premium is less than $200,000.
• Consider the cost on other coverages (property, auto, etc.) if workers' compensation were removed from your standard insured package of coverages--the underwriter was probably looking at the whole package when the premium was set.
• Consider the additional cost potential if safety, loss control and industrial hygiene services were required.
• Consider the additional costs to process, investigate, record, assess, and pay costs, along with the additional costs to attend hearings and hire legal counsel.
• Compare costs of self-insurance to every type of insured plan: dividend plans, retro plans, cash flow retros, deductibles, etc.
• Be certain senior management is fully aware of every cost aspect of self-insurance, including exposure to unfunded losses of other self-insureds that may fail.
• Have a firm fix on cost projections for working capital needs. Realize that cash paid out after five years reduces early cash flow savings and that only 25 percent of claims pay out in the first year.
• Determine claim retention limits and aggregate and excess insurance costs.
• Consider current and future costs mandated by the state, especially the possible effect of assignable future residual market shortfalls.
• Know what the minimum safety and loss control costs and claim-handling costs will be.
• Know the amount of security the state will require and what costs and availability will be for surety bonds, letters of credit, and cash.
• Know each aspect of your losses, costs and reserves for the past three years and project trend estimates into the next three years.
• Be prepared to have an independent insurance consultant assist in all aspects of your determination. Be wary of having your agent/broker or a competitor broker assist. The independent consultant's objectivity is of benefit.
• Visit and consult with the state workers' compensation division of self-insurance.
• Obtain applications for self-insurance and review and analyze each requirement. Private corporations may not wish to make their financial reports public information, which is generally necessary if you self-insure.

Reprinted with permission. © CCH