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Self-insuring workers comp: Is it for you?

You can self-insure in every state except the District of Columbia, Montana, North Dakota, and Wyoming.

There's one sure way to fight rising workers compensation premiums, but it's not for everyone. In 47 states, companies that meet certain size, payroll, and premium levels can take on their own workers comp risk instead of paying an insurance company to do so. This is known as self-insuring, and it's also done with health insurance.

The National Academy of Social Insurance estimates that self-insuring companies paid about 19 percent of all U.S. workers comp premiums in 1998.

"When you're buying workers comp, or any insurance policy, you're paying a set fee up front, and transferring risk to the insurance carrier," explains Mike Ferguson of the Self Insurance Institute of America (SIIA). "They need to finance operations, cover claims, and make money. The dollar value of premium has to reflect those costs. If you self-insure, your costs are the benefits that are paid out to the injured employee. You're paying the true cost of what your actual claims are, as opposed to the insurance premium with markups for the insurance company's expenses."

Fred White, an independent risk management consultant in Dallas, estimates that for each premium dollar you pay, 78 to 85 percent goes to workers comp claim expenses, but the remaining money goes to insurance company expenses. Those include agent commissions, which range from 5 to 15 percent, and a 3 percent allowance for loss-control services — a feature White claims can cost the insurer half that amount.

"You're paying the true cost of your claims."

In 34 states, smaller companies not allowed to self-insure can join a pool of small employers, usually as part of a trade association, where the combined assets of members allow them to self-insure. Ferguson of the SIIA estimates that 500 such pools exist nationwide. But outside of a self-insurance pool, Ferguson says, "The small employer is less likely to self-insure, because the risk is spread among fewer employees. Smaller companies can viably self-insure through a group workers comp situation." (For guidelines in your state, click to the Insure.com Workers Compensation Insurance Law tool.)

How it works

Companies that self-insure can maintain in-house claims management administrators, or farm these services out to a third-party administrator who, for a nominal fee, handles paperwork and benefits payments. By the same token, you can establish your own risk management services or hire consultants, which gives you more flexibility in choosing a risk management provider (insurance companies will provide the service, or pick one for you).

Is self-insurance a good deal? By definition, it has a major pitfall: All payments come out of the employer's pocket. If you're hit by a wave of claims, or by one major accident that results in many claims, that could be a major financial disaster. Fortunately, "excess insurance" is available to cover those unexpected losses. Excess coverage is not standard commercial coverage; rather, it reimburses the employer for any claims over a specified amount.

Stan Smith, risk management director at Boyd Gaming Corp., a Nevada casino company, says self-insurance works for his company because the employer can take control of the workers comp program. Smith believes that having a third party handle workers' injury claims can create problems between employees, management, and the insurer, with the employee caught in the middle. With self-insurance, there's no middleman, giving the employer greater control over workers comp practices and programs.

Self-insuring works well for industries with high losses per employee.

In addition, Smith says, he's calculated that self-insurance costs Boyd Gaming $0.55 for each $100 of payroll. That's compared with $4.59 for each $100 in payroll when the company was fully covered an outside insurer. "That includes staff, claims cost, bonding requirements, excess insurance, everything we do," he says.

Self-insurance also skirts the treacherous up-and-down workers comp premium market, where premiums that were artificially low for years are now creeping up.

In general, self-insurance works best for industries with high injury rates, such as manufacturing and construction. White-collar industries see fewer cost savings per employee with self-insurance. That's because industries with many workers comp claims pay more premium dollars per employee if they're commercially insured, so the cost savings garnered from self-insurance can be substantial if you have a great safety track record.

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