Analyzing Self-Insurance as an Option, Part 3

Sunday, April 28, 2002 | 0

So far in this series we've talked about some of the benefits (and pitfalls) of a self insurance program and reviewing infrastructure capabilities. Now we'll review assessing the company's operations and exposures as the final step in analyzing the applicability of a self insurance program for your operation.

The Operation and Exposure Audit

A crucial step in the self-insurance feasibility process is for the organization to review and assess its operations and exposures. Where the organization operates can play a key role in determining whether self-insurance is a viable alternative to workers compensation insurance. Different states permit different types of self-insurance/administration. You need to research all of the states that the organization does business in to determine what the variances are and whether the organization can justify the expenses associated with these variances.

Furthermore, the organization must file its plan for approval in each state where it hopes to operate as a self-insurer, which increases administrative costs. When an organization has some of its operations in states that do not allow self-insurance, arrangements must be made to handle these states separately through workers compensation insurance which can also increase the administrative workload.

Some organizations will need to consider how acceptable self-insurance will be to their customers, business partners, and stockholders. The instability of expenses under a self-insurance program might not be viewed favorably.

Often times, contracts will specify that the subordinate party maintain minimum amounts of workers compensation insurance from an insurer that satisfies certain criteria, such as state licensing and minimum financial ratings. Since self-insureds do not maintain conventional insurance such requirements cannot be satisfied unless it can be demonstrated that the organization has a successful record of effective self-insured administration.

In conclusion, there is no hard-and-fast rule that dictates when workers compensation self-insurance should be considered. But, when an organization reaches the point where exploring alternatives to workers compensation insurance makes sense, then it becomes essential for an organization to fully evaluate the factors that affect that decision. However, self-insurance should not be entered into in a vacuum. Full evaluation of all of the various factors that have been discussed in this series is a minimum requirement if a self-insurance program is to pay for itself.

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