Different states have different requirements for workers compensation insurance. If your business is located in a state that permits self-insured workers’ comp, either stand-alone or group self-insurance, then you might consider one of these options, especially if your business has strong cash flow and manageable risks. Here are some reasons why self-insured workers’ comp could be a good fit for your business as well as some tips on how to manage it.
Insurance is basically a government approved form of gambling. The “house” is the insurance carrier, and as we all know, the “house” sets the odds on any “risk” they offer to cover to the person placing the bet; that risk is you, the potential policyholder. The potential policyholder decides “if,” “when,” “how much” and on “what” they wish to place their bet, in the form of premium. The underwriters review the prospective policyholder’s risk and decide if it’s a bet the insurance carrier is willing to cover. If the underwriter likes the risk, they issue a premium quote (bet) to the potential policyholder indicating the circumstances (policy) and $-amount (premium) under which they would be willing to accept the bet. The policyholder makes the final decision as to the cost of the bet vs. the potential risk should the policy coverage be needed.
Understanding Your Position in the Pool
In order to make an informed decision regarding self-insurance, you must first understand your position in the insurance “pool.” Insurance works by bringing together a large pool of businesses with what the carrier considers “manageable and predictable risks.” The larger the pool of policyholders, the greater the spread of risk for the carrier, and the greater the stability of the pool. The pool of policyholders can roughly be broken into two categories of insureds; good risks and not-so-good risks. In the world of insurance, policyholders with little or no losses (good risks) subsidized those policyholders that were unfortunate enough to win their bet by having high losses during a particular policy period. It’s not really that black and white, there are gradations to be sure. And most insurance companies help you with this “gradation” by giving you an “experience modifier (XMod)” as part of your annual premium quote. The
XMod is a number calculated by the insurance carrier, and it ranges either north or south of the number “one” (1). The number “one” is considered to be the par risk for your particular industry. A simple way to think of it is; if your calculation XMod is “1.2,” then your business could be considered to be 20% more likely to have a significant loss than an insured company that has a “1.0” XMod. It works the same in the other direction. If your XMod is “0.8,” then the insurance carrier calculates that you are less likely to have a loss than the average business in your industry.
Risks vs. Rewards
There are risks associated with self-insured workers’ compensation to be sure. Especially for businesses with an unpredictable cash flow and/or hard to manage risks. If your business has safety issues, high loss exposures, supply-chain issues, or cash flow problems, then self-insured workers comp might not be the best choice for your business.
But for businesses with a steady flow of cash, good management practices, and a history of good XMods (consistently under 1.0), then self-insurance may be the best bet you can make on your business.
Implementation & Management Tips
Considering a move to self-insurance might seem daunting, and executing on this business decision requires a full commitment on the part of the organization. This is true especially if you have multiple locations or a mix of operations producing different types of risk. The good news is that as you envision taking steps to this type of self-insuring, it can be done in tandem with your HR department, funneling worker safety and loss control programs into a more formal approach. Fortunately, today’s cloud-based platforms have made it easy to integrate easy-to-use workers’ comp management software with your existing systems and outside third-party administrative services or tools, making it an affordable choice.
Cloud-based workers’ comp software is a beneficial tool and platform, not only for its data encryption and security, but because updates are made as soon as there are changes in industry regulations. Platforms that integrate with existing third-party administrator systems assist small businesses by providing claims and loss information as soon as it is needed while a platform that integrates with legacy systems is essential for long-tail workers’ compensation claims.
Self-insured workers compensation doesn’t have to be difficult to manage. With the right system and support services, your small to mid-size business can implement, or join, a self-insurance program that is tailored to your business’ specific needs.