Self-insurance is an alternative to purchasing a workers’ compensation insurance policy. Employers can choose to self-insure their workers’ compensation liabilities to cover their employees for reasons of cost effectiveness, greater control over their claim’s programs, and increased safety and loss control management. Small and medium-sized businesses have the option of joining with others in the same industry to self-insure their workers’ compensation liability as a Self-Insured Group.

The success of a workers’ compensation self-insurance program is often dependent upon the effectiveness of loss control activities and claims supervision. Most self-insured employers contract with third-party administrators to perform some of these services, while some qualify to handle their own claims administration.

To receive self-insured status, the employer must qualify through an application process, meet specified financial requirements, and be approved by the Director of the Department of Industrial Relations.

California has one of the largest self-insurance programs in the nation and has some of the strongest regulations designed to ensure the system protects both employers and employees. As of January 2022, the state had a total of 25 active SIGs.

Self-Insured Groups in California by the Numbers – 2023

• $7.7 Billion total self-insured payroll.
• 224,991 CA Workers covered by self-insurance.
• 25 CA Groups are active self-insurers.
• 1,863 CA Group members are active self-insurers.
• $236 Million Estimated Claims Reserves.
• $108 Million Medical and Indemnity payments.
• 5,020 Open Workers’ Compensation cases.

Where SIGs Began

In 1994, the California Legislature authorized groups of private employers to form Group Self Insurance programs for their workers compensation liabilities. Open rating was also allowed in 1995, causing rates to decline to historic lows over the next few years.

However, employers did not begin to take advantage of this money saving opportunity until 2002, when the first group workers compensation program was approved. Since then, more employers have decided that taking control over this portion of their responsibilities now and for the future, through group self-insurance, is very cost effective.

While this concept is relatively new to the private sector in California, the public sector has taken advantage of the cost savings for decades by utilizing a joint Powers Authority (JPA). Cities, counties, and various other public entities have pooled their risk and financing to make sure products are available and more affordable. The private sector self-insurance model is based on this very successful historical public track record. Today approximately half of all public entities in the US are participating in some form of insurance risk pooling.

Workers’ Compensation and Self-Insurance in California – A Long Standing History

1913 – California established a workers’ compensation system through passage of the Boynton Act. The act covered three main areas: compensation of injured workers, safety for workers, and provisions for a state insurance fund. The act created an independent Industrial Accident Commission to implement the law.

1914 – State Compensation Insurance Fund, established by the Boynton Act, opens its doors to provide an available market for workers’ compensation insurance and be a model for private insurance carriers. State Fund is considered the insurer of ‘last resort.’

1984 – The California Self-Insurers’ Security Fund (CASISF) was established by the California State Legislature to ensure the continuity of workers’ compensation benefits of self-insured companies that have defaulted on their workers’ compensation obligations – usually due to bankruptcy.

2003 – The California legislature passes the Alternative Security Program (ASP) into law. The California Self-Insurer’s Security Fund ASP allows stand-alone self-Insurers to free up their cash or line of credit, allowing them to invest this capital back into their businesses while the ASP assumes responsibility for their security deposit posting requirement. The ASP provides stand-alone members with a low-cost substitute for collateral with no balance sheet impact.

2012 – The California Legislature enacted groundbreaking workers’ compensation reform with the passage of SB 863, signed into law by Governor Brown. This legislation fundamentally transformed the operations of self-insurance in California. One of the most significant changes was the overhaul of collateral posting requirements, shifting from a simplistic calculation based on a straight factor multiplied by claims reserves to a more sophisticated approach utilizing actuarially determined total loss exposure.

2013 – The implementation of SB 863 has led to a comprehensive adjustment of SIG collateral to align with total liability exposure, significantly enhancing the strength and solvency of groups for their members. Furthermore, robust new requirements for SIG capital solvency, stringent measures to address conflicts of interest among service providers, and independent oversight mechanisms have been established, reinforcing the financial resilience and integrity of SIGs.

2020 – The global COVID-19 pandemic reshaped workplace safety and fundamentally altered the nature of work itself. Over nearly two years, the workers’ compensation system faced unprecedented turmoil, as the predictability of historical claim frequency and severity evaporated. The impact on businesses was staggering; according to Harvard University, a staggering 35.9% of California businesses closed their doors during this crisis, highlighting the widespread disruption and uncertainty that characterized this tumultuous period.

2023 – 7036 California employer self-insure their workers’ compensation exposure covering more than 4.4 million workers – 1 in every 4 California workers – representing a total payroll of $303 billion. Of these, 1,863 employers are members of self-insured groups.

References:

(1) California Self-Insurer’s Security Fund

(2) State of California Department of Industrial Relations