"Should We Self-Insure?"

John A. Dirkse
Assistant Vice President
Frank B. Hall & Co. of Wisconsin

Alternatives to traditional insurance or risk financing methods, such as individual loss sensitive programs for Worker's Compensation can be valuable. However, many decisions and proper planning will prevent your county from entering into such an endeavor without understanding the pros and cons of this decision. This article is intended to portray those considerations so that we discussing, "Should we self-insure?", your County will be taking a heads up, informed view of the decision-making process.

From my first years in the business, with a leading Worker's Compensation carrier, I have viewed the transition of the Worker's Compensation marketplace and watched many commercial and public entity clients make drastic decisions based on the "huge" savings offered by self-insurance. Some of these efforts have been extremely successful and others have struggled or failed. When I look back with 20/20 vision in retrospect, it is easy to determine the reasons for these successes or failures.

The programs that usually encounter problems, are those that merely focus on the "huge savings." The decision to self-insure was made because someone thought or was told that "you can do it better!" With proper planning and forethought, this can be achieved for the those Counties willing to totally commit to the endeavor.

Let us take a look at some suggested qualifications for those seeking to explore the benefits of self-insurance. It has been suggested by many public entity risk managers that a Worker's Compensation premium levels of well in excess of $300,000 is needed to feasibly entertain a self-insurance proposal. This level can be a separate topic of discussion, however, let us use this as a basis point for the decision making process.

Next consider the advantages of self-insuring to determine whether your county is ready to work through the commitments necessary to realize these advantages. The advantages to self-insurance are: (1) Stability - In many parts of the country, the Worker's Compensation structure is in serious trouble. Fortunately for Wisconsin counties, the climate here, while changing is certainly healthy. We have excellent competition and responsive carriers. However, you will definitely experience stability by assuming control of the risk, and purchasing a level of excess premium to protect against catastrophic losses. You can expect to experience some fluctuation in excess premium costs, but because you are taking the majority of the risk this fluctuation will be controllable. (2) Control - There are aspects of control in your self-insured effort. A great deal of care should be exercised in this area. Consideration should be given to whether the county will hire in-house claims and loss control personnel or use a Third Party Administrator will be used. If using in-house staff, care should be taken to make certain that the staff is qualified to handle the entire claims process. Additionally, in order to be successful, a high degree of loss control will be needed to protect the funds in this program. When the decision is to use a Third Party Administrator, you must carefully select a firm. Questions regarding experience of servicing staff, expertise of key decision makers, references of both current and former clients and an explanation of how your account will be serviced, are key concerns in the selection process. Once selected, the County cannot simply turn the account over to the Third Party Administrator and walk away. Careful management of the Administrator's service is key to the success of this contracted service. Simply put, the question you must ask yourself is, "Are we committed to managing our self-insurance effort, from either a dedicated, employed staff or through management of our Third Party Administrator?" If the answer is yes, then a properly prepared program has every chance of succeeding. (3) Cash Flow - Self-insuring does allow for the county to hold and control it's own reserves and earn interest income until a claim is actually paid. This control of reserves can be of an advantage to the self-insurer. It is important to remember that you must act like an insurer when being self-insured. Funding of the program should resemble premium charges to the various departments and proper reserving will be key to controlling the budget demands of under-funded and under-reserved programs. This forecasting responsibility cannot be taken lightly. Recent Governmental Accounting Rules establish defined procedures for reserve funding and accounting. Counties or public entities can no longer operated on a cash or paid loss basis. Since many insurance carriers offer a variety of cash flow plans, a county's options must be compared to the cost of self-insurance and management in these critical areas.

There are several other decisions that enter the decision-making process. The following portrays the possible deterrents and solutions as you consider the self-insurance path:

Problem:

Complicated budgeting process resulting from a variance in actual vs. expected costs.

Solution:

Actuarial determination of funding and the purchase of excess insurance to cap losses. Care should be taken to fund for levels within the amount of self-insured retention you have selected.

Problem:

Adequate funding of reserves for losses and structured discipline in protection of these reserves.

Solution:

Structured Governmental Accounting Practices should prevent "tapping" of these funds for other purposes. Internal policies and procedures should be established to prepare for turnover in the staffing that controls this fund.

Problem:

The administrative burden of hiring qualified staff, handling own claims, or the hiring of a Third Party Administrator.

Solution:

Effective, committed management will be required regardless of the path you take. The decision to self-insure requires dedication and commitment of staff and operational employees alike. It is not simply, we will pay our claims and walk away.

Problem:

The decision to self-insure is made of the immediate dollar savings through improper funding or reserving.

Solution:

Rather than self-insuring, you have decided to carry no insurance. It is critical to properly fund and reserve for losses for the long-haul. Anything short of this equates to no insurance and will continually be a drain on the county budget.

Self-insurance, like many other decisions you are asked to make relative to risk management, are good decisions when proper planning and understanding of the commitment and dedication to the effort are made. This article only touches upon several of the key considerations necessary when looking to self-insurance for your Worker's Compensation program.

The decision to self-insure should not be considered a short term solution to today's budget demands. While the appearance of savings can present itself in the "green" years of the program, there is likely to be considerable variance in the level of savings from year to year as the program matures. The decision to self-insure must involve a long term commitment to be measured over as much as a ten year period. Please thoroughly explore these and other questions you may have before making your final decision.

Again, a topic such as this, like others addressed in past articles cannot be fully presented in the confines of this magazine. If this article has generated any questions, please contact me or discuss them with your consultant, or agent.