The Basics of Self-Insured Groups

What is a Self-Insured Group?

Self-insured groups, commonly known as “SIGs,” have existed in California for two decades. They serve as an alternative to traditional workers’ comp insurance, whereby employers in the same industry band together to spread risk across their organizations. In doing so, members of a SIG can experience a wide range of benefits.

What are the benefits of joining a SIG?

• Improved Claim Outcomes: SIG members are able to take a more active role and have a greater impact in the handling of their employees’ claims. This means open lines of communication with the claims administrator, faster claim resolution, and more accurate and efficient reserving practices.
• Greater Control: SIGs afford 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, SIGs can achieve lower claims costs, reduced litigation, quicker return-to-work, and better service.
• Cost Savings: When a SIG is operating effectively, it has the potential to generate savings for its members because rates do not include the profit margin that insurance carriers would charge for standard coverage. Short-term cost savings, however, is not a sufficient reason to join a SIG. Savings are never guaranteed.

What does a good SIG member look like?

SIG members come in many different shapes and sizes, but they all have one thing in common: a long-term vision for building a strong workers’ comp program. A good SIG member is involved in the workers’ comp aspect of their business and has ideas for ways it could be improved. It is also critical that SIG members are able to cooperate with each other for their mutual benefit, even though they may be competitors in the field.

SIGs are non-profit member-owned entities that are managed by a board of trustees comprised of members, elected by the members. This places the control and decision- making responsibility for the group with the members. The members of the group by electing a board of trustees from the membership enjoy the benefit of the leadership and decision-making process being in their best interest.

This is different from an insurance company who has a primary duty to act in the best interest of its shareholders and to make a profit. This shareholder-profit motivation is at the heart of every decision an insurance carrier makes including their claims policies and procedures. Most carriers are also publicly traded companies, and their secondary goal is to satisfy the investment analysts which focus on short- term earnings and profitability.

These differences between a member-owned and controlled non-profit versus short-term results and shareholder-profit motivation are a key difference and a main reason why SIGs have stable and competitive rates across all markets and economic conditions. Carriers on the other hand have demonstrated a lack of stable rates, and in the last hard market many carriers stopped writing workers’ comp coverage, left the California market all together, and the term loyalty lost its meaning for existing and long-term policyholders.

The Safeguards of Self-Insured Groups

California strengthened and established a national standard and model regulatory framework for workers’ compensation, self-insurance, and self-insured groups with the enactment of SB863 in 2013. As a result, there have been three significant and major regulatory updates made to the rules governing self-insured groups. Some of the key points of these regulatory enhancements and updates include:

Actuarial Analysis: Establishing an independent actuarial standard for determining the total ultimate exposure of a self-insured group that includes not only the medical and indemnity, but also the ULAE, ALAE and IBNR at the expected ultimate level.

Collateral Deposit: SIGs are required to post with the State collateral equal to the independent actuarial determined total ultimate liability. This amount is reviewed and updated annually and can be satisfied by the SIG’s securing of a surety bond.

Conflict of Interest Provision: A regulation was established requiring independence between the group’s board, administrator, broker, third-party administrator, certified public accountant, and actuary. This creates a strong check-and-balance among the independent advisors and the board of trustees of the groups. This further established a higher degree of integrity and ability to rely on the actions of each of these advisors to act in the best interests of the group and its members.

Solvency Test: A solvency regulation was established that sets forth a formula for each SIGs budgeting and rate setting process annually to ensure boards of trustees are establishing rates based on budgets that fully address operating, reserving and collateral requirements, while additionally covering the medical and indemnity claims requirement at 1.5 times the annual incurred amount. This provides the SIG with an additional excess reserved amount of six additional months of claims costs each year. The budget is self-balancing and resets annually.

Independent Auditors: Regulations were enacted establishing professional standards and requirements for the independent auditors and actuaries to insure a minimum standard of professional certification and credentials. It also has a provision that expressly holds the auditors and actuaries liable for failing to meet these standards of care and professionalism in the preparation and presentation of the annually prepared GAAP audited financial statements and actuarial studies.

Investment Policy: There are strict investment policy standards and regulations that require reserve, collateral, and excess funds to be conservatively invested only in approved investments.

State Regulation: SIGs are highly regulated by the State and also have separate oversight by the California Self- Insurers Security Fund.

• SIGs are required to annually file an employer’s annual report detailing all claims activity for both the current, and ALL historical years.
• SIGs prepare and file an annual budget and rate plan. These are developed using both the actuarial study and meeting the solvency standard regulation.
• SIGs cause to be prepared and submit annually a GAAP audited financial statement independently prepared by a certified public accounting firm.
• SIGs cause to be prepared and submit an annual actuarial study independently prepared by an approved actuarial firm.
• All SIG decisions are made by an elected board of trustees comprised of members of the group. These actions are documented, submitted, and reviewed by the State.

Annual Audits: SIGs are audited annually by OSIPs audit division with a desk audit performedannually and a field audit performed tri-annually.