All Your Questions About Self-Insurance, Answered
Under the workers’ compensation system in California, all employers must provide benefits to employees who are injured or become ill on the job. However, employers have some degree of flexibility in determining how to provide the necessary coverage.
While most employers have traditionally purchased “guaranteed-cost” insurance policies to cover all of their workers’ compensation-related expenses, more and more are beginning to consider other alternatives such as self-insurance.
What does it mean to be self-insured?
Employers that are self-insured are certified with the State of California’s Office of Self-Insurance Plans to provide their own coverage for their workers’ compensation-related expenses. This means that instead of paying expensive insurance premiums to cover employee medical claims, self-insured employers retain the risk and pay for the claims themselves.
In most cases, self-insured employers will obtain excess insurance policies to protect themselves from any claims above a designated dollar amount.
What are the benefits of being self-insured?
While self-insured employers do carry some additional risk, there are ways to mitigate that risk and take advantage of the various benefits that self-insurance has to offer:
- Cost savings: By not paying for an insurance policy, self-insured employers save on the mark-up that insurance companies charge for overhead, administration, commission and shareholder profits. A 2018 report found that these expenses account for a whopping 37% of insurance premium dollars.
- Increased flexibility: Self-insurance affords employers a greater degree of flexibility and control in designing a workers’ compensation program that best meets the needs of their business and employees. By customizing their programs and selecting their own vendors, self-insured employers can achieve lower claims costs, reduced litigation, quicker return-to-work, and better service for employees.
- Improved financials: Self-insured employers pay for workers’ compensation costs as they are incurred. This structure results in a number of financial benefits, including improved cash flow, reduced capital outlay, improved credit position, and a stronger balance sheet.
What are the options for becoming self-insured?
Employers considering self-insurance should be aware of the various options available to them. The PATH Alliance offers a comprehensive Program Evaluation & Analysis service to guide employers in understanding the different types of workers’ compensation programs and deciding which is best suited for their particular business.
For employers that want to become self-insured, they have the option of either becoming a stand-alone self-insured entity or joining a self-insured group of employers.
As an employer, the decision to become self-insured often stems from a desire to become more engaged in managing its workers’ compensation program. Certain industries (such as utilities, agriculture, manufacturing, construction, and transportation) tend to benefit more from self-insurance than others. For this reason, many employers in these industries will join together in a group to share the workers’ compensation risk with other similar employers.
Are there collateral requirements for self-insurance?
All self-insured employers in the state of California are required to post collateral to cover their workers’ compensation liabilities in case of insolvency. This often dissuades employers from becoming self-insured, believing that the collateral requirements are too burdensome.
However, most self-insured employers qualify to participate in the Alternative Security Program offered through the California Self-Insurers’ Security Fund (CSISF). This program was created in 2003 in order to assist in satisfying security deposit and collateral requirements for employers considering self-insurance.
In the case that an employer does not meet the credit rating required to participate in the program fully, it may qualify to participate partially or need to post cash, surety bonds, letters of credit or approved securities for coverage. Additionally, the ASP is not applicable to self-insured groups.