Frequently Asked Questions Here is a list of Frequently Asked Questions about the Self-Insurance Industry and more specifically, Self-Insured Trusts. The answers to these questions will help to provide a more thorough understanding of Self-Insured Trusts, including the risks and rewards of joining a Trust, as well as how Trusts are administered and regulated. Should you have additional questions that are not answered in these FAQs, please feel free to Contact Us by phone or e-mail. What Is A Self-Insurance Group?
A: A self-insurance group is an association
of employers formed for the specific
purpose of providing statutory workers’ compensation and
employers’ liability coverage. Organizations that form
self-insurance groups are typically, but not limited to, medium-sized
companies that may not have the size or financial capacity to
become a self-insurer on their own, yet want to assume control
over their workers’ compensation costs. They desire the
same benefits and savings realized by large self-insured companies
without exhibiting the same vast monetary resources. Q: What Benefits Do Self-Insurance Groups Offer? A: The primary benefits that can be expected from membership in a self-insurance group are:
Q: How Do Self-Insurance Groups Work? A: A self-insurance group enables employers to assume a major portion of their risk and provides group purchasing power for excess insurance to cover losses incurred individually or collectively in excess of a specified amount. Members of self-insurance groups pay a contribution to the group based on the exposures, classification codes, payroll, experience modifications and rates developed by the group or the state workers’ compensation rate making bureau (depending on the state). Contributions paid by members are used to pay covered losses, claims administration and costs associated with the management of the group, such as loss control, legal accounting, actuarial, and excess insurance. Surplus from both the claims fund and the administrative expense fund can be returned to group members on a pro rate share basis the form of dividends of by the reduction of future rates. Many costs associated with traditional workers’ compensation
insurance, such as premium taxes (in most states) and residual
market charges, do not apply to
self-insurance group. These costs can amount to a significant
percentage of
traditional workers’ compensation insurance premiums and
by eliminating these aspects, self-insurance groups are able
to provide coverage at a lower cost to the client. Q: How Are Self-Insured Groups Regulated? A: Self-insured groups must receive approval to operate from the workers’ compensation agency or the state insurance department, and the qualification standards vary from state to state. Self-insurance groups are required to follow the laws and regulations set forth by the state from which they are operating. Although the specific requirements for the administration of self-insurance groups may vary, the state regulatory authority’s role is to ensure the group’s ability to administer and pay claims through appropriate planning and funding. Coverage requirements: Most regulatory authorities require that a self-insurance group purchase additional coverage, such as excess insurance on both a specific and aggregate basis to insure that they can pay catastrophic losses. The amount and type varies by state. In the unlikely event that a catastrophic event occurs, this coverage is in place so that the group’s assets will not be exhausted. Financial requirements: The regulatory authorities require that self-insurance groups meet various financial requirements regarding net worth, profitability, liquidity, and solvency. Security requirements: Self-insurance groups are required
to post security in the form of cash, surety bond, negotiable
securities, an irrevocable letter of credit, or a combination
of these. Q: How Are Groups Administered? A: Self-insurance groups select a board of trustees to govern the activities of the group. These activities include setting criteria regarding eligibility, where to purchase excess insurance, the distribution of dividends, the selection of service providers, etc. Self-insurance groups are responsible for the payment of
claims in conformance with state workers’ compensation
laws. In addition, groups usually require a variety of
services, such
as loss prevention, loss control, and claims management.
To a large extent, the success of any self-insurance group
depends
on how effectively it manages and integrates many of these
activities. To operate most effectively, an outside
licensed Third Party Administrative firm (TPA) is usually
selected to provide a variety of these services. A: A primary benefit of self-insurance is the degree of control a group can exercise over all aspects of the claims handling process in order to help contain costs. A group may select to implement a variety of claims management services including:
Q: What Is The Purpose Of Underwriting Services? A: Underwriting is required to develop guidelines for membership,
evaluate exposure to loss for individual members and the
group as a whole, calculate the contribution each member
should pay
to the group, and establish loss reserves in compliance
with state regulations or guidelines. Q: What Are Feasibility Studies? A: Feasibility studies play an integral part in the process
of forming a self-insurance group as well as once a group
has been
formed. When organizing a self-insurance group, they are
used to review and analyze specific state regulations and
to provide
specific financial and actuarial information to the regulatory
authority. Once a group is formed, studies help prospective
members determine the financial/cash flow effects that
joining the group
will have on their firm. Accurate loss forecasting is an
extremely important component of a feasibility study and
usually requires
a minimum of three to five years of premium, payroll, experience
modification, and claims history. A pro forma financial
statement can then be prepared regarding the prospective
group. Q: How Are Accounting and Financial Management Matters Dealt With? A: Self-insurance groups are responsible for the proper establishment, maintenance and administration of accounting procedures and financial controls including:
A: Case management is an effective way to reduce cost through early intervention and an effective early-return-to-work plan. Case management includes:
A: Risk management and loss control planning are designed to prevent losses from occurring, in addition to reducing their frequency and severity. Risk management specialists can:
Q: How Are Marketing and Membership Issues Conducted? A: Marketing and membership of self-insurance groups require
ongoing efforts to promote the group’s program, attract new members, and evaluate applications
of potential members to ensure the group’s long-term survival and
continued financial viability. Risk management consultants, insurance companies,
and insurance
brokers are just a few of the resources that can assist a group in gathering
information on prospective group members. Q: What Legal Services Are Necessary? A: Because workers’ compensation is so closely regulated effective
service is crucial, not only for handling claims and controlling losses,
but also to
insure that groups comply with the various compensation laws. Numerous
applications must be filed with state regulatory authorities to receive
authorization for
the formation or maintenance of a self-insurance group. Q: How Are Management Information Systems Utilized? A: In order to achieve optimum success, self-insurance groups require management information systems capable of providing a variety of information management services including payments to providers and injured employees, calendaring of reoccurring payments, filing of forms, etc. The system must have the capability of recording important information and log notes, as well as produce statistical reports including loss experience, claims summary and loss level reports that help monitor and control losses. Also essential are reports that detect trends in losses, develop loss cost, and predict future losses. They are also used to assist in the rate calculation procedure. In addition, members and providers should have remote access
to the management information system for the reporting of claims,
review of losses, and
communications to claims examiners. Q: What Are The Risks vs. Rewards Of Joining A Self-Insurance Group? A: Self-insurance groups offer many advantages over insurance company plans. When evaluating participation in a self-insurance group one must weigh the numerous rewards against the following risks: Joint and Several Liability: In a majority of cases, members of the group are both jointly and severally liable for workers’ compensation and employers’ liability losses incurred by the membership while they are members of the group. The subsequent bankruptcy or termination of a member does not release the remaining group members for this liability. Multi-State Operations: Self-insurance groups are regulated by the state and may only cover exposures within that state. As a result, an employer with operations in more than one state must find an insurer, another self-insurance group, or alternate means to cover any out-of-state portions of the workers’ compensation exposure. Administrative Functions and Additional Costs: Many
of the services usually provided by an insurer (i.e. claims administration
and
record keeping,
loss control, legal
services, and actuarial services) are now the responsibility
of the group. The group must select the services it requires,
and
if necessary,
hire
service providers
where appropriate. |
