Everything to Know About Self-Insured Workers’ Compensation

Workers’ compensation insurance is an important part of the employer/employee relationship. These insurance policies provide financial coverage for employees injured on the job, helping to cover expenses associated with medical treatment and lost wages while the injured employee is unable to work. Most companies seek this insurance through third-party providers, yet more and more employers are choosing self-insured workers’ comp as a means of controlling claims and costs. In this guide, we’ll explore self-insured workers’ comp plans, including the benefits companies may experience when choosing this form of employee protection. 

What is Self-Insured Workers’ Compensation?

As mentioned earlier, most employers purchase workers’ compensation insurance from a traditional insurance provider. In this arrangement, the employer pays fixed premiums to the insurer or to a state-sponsored Workers’ Comp fund, and the insurer handles all aspects of the claims process, including paying out benefits if a covered employee were to become injured in the workplace.

Self-insured workers’ comp, on the other hand, eliminates the third-party insurance company; for the self-insurance arrangement, the employer pays out-of-pocket claim costs for covered employees, and assumes all financial risk. This alternative workers’ comp solution has grown in popularity in recent years, and industry estimates suggest that over 6000 employers operate self-insured workers’ comp programs. Employers may opt for individual programs, or may pool financial resources with other companies to form group self-insurance programs.

Not all states allow employers to self-insure their workers’ compensation; self-insurance plans must meet stringent regulations in order to be approved by some states, and the employer must have certain cash reserves in order to handle employee injury claims. 

What are the Benefits of Self-Insured Workers’ Compensation Plans?

Employers across the country seek to manage overhead expenses, especially when it comes to employee benefits. Healthcare insurance ranks just behind employee salaries in terms of the highest annual expenses an employer faces. Workers’ comp insurance, required by most states, is another high expense, and one fraught with complex claims processing rules and regulations. 

When choosing self-insured workers’ comp as an alternative solution, employers may gain several advantages, including:

  • Freeing up cash flow with a “pay as you go” approach, rather than having to pay high premiums in advance of injury claims.
  • Better cost controls; self-insurance plans are typically less expensive to administer than those provided by traditional insurers.
  • Better claims management. Claims are handled in-house, or are processed by a third-party plan administrator.

Are There Drawbacks to Self-Insured Workers’ Comp Plans?

Drawbacks to self-insured workers’ comp plans are few, but they bear consideration for any company that wishes to explore this insurance alternative. In general, self-insurance programs offer better management and flexibility while helping to reduce overhead expenses. Two possible scenarios can upend these benefits, however:

  • Single large injury claims
  • Excessive injury claims in any given year

Companies with self-insurance plans must have adequate financial resources to fund the program at the beginning and at any time claims are made by injured employees. To counter any shortfalls in finances, companies may opt to purchase excess insurance for employee coverage beyond a certain dollar amount. 

Another potential drawback of self-insured workers’ comp is the claims management process. Those companies that choose self-insurance must be able to manage diverse aspects of the plan, and may require specialized skills, including:

  • Medical and legal knowledge for evaluating claims and for any potential litigation that may arise from claims.
  • Negotiation skills for obtaining services from care providers.
  • Risk management, safety, and loss-control experience to avoid excessive claims activity.

Again, third-party plan administrators are available to handle these aspects of the self-insured workers’ comp model. These administrators offer many of the same claims processing and management services as traditional workers’ comp insurers do. 

Even with these potential drawbacks, self-insured workers’ comp plans are gaining acceptance throughout the United States. With this alternative option, employers can manage costs while still providing excellent coverage for their most valuable assets: their employees.

About Caitlin Morgan

Caitlin Morgan specializes in insuring assisted living facilities and nursing homes and can assist you in providing insurance and risk management services for this niche market. Give us a call to learn more about our programs at 877.226.1027.