Things you might want to know

Is Self-Insurance Right For You?
By Joseph S. Ammons
Assistant General Counsel
Alabama Department of Labor
Workers’ Compensation Division

Employers are constantly searching for new ways to reduce expenses. In the private sector we all can agree that the bottom line for any successful business is profit. Achieving a profitable margin can best be accomplished by improving revenues and lowering costs.

In Alabama, a large financial responsibility of any employer who employs more than 4 employees is workers’ compensation. In 2001, employers in the State of Alabama paid out over $607,000,000 in workers’ compensation losses. It is a huge business in this state. Many employers continue to question how they can reduce their workers’ compensation costs. The basic premise - cut your losses and you cut your premiums. At least that’s the theory. Cutting your losses, however, is not always a complete solution. There are still other ways of reducing your costs and improving your results. One area that may be an option for you to consider is whether it is worth the time, risk and effort to self-insure your workers’ compensation program.

The Alabama Department of Labor, Workers’ Compensation Division, performs a variety of functions, one of which is the regulation and management of individually self-insured employers throughout the State. As the regulator, the Department is constantly striving to ensure that all self-insured employers are financially qualified to handle any injury or loss that they are expected to incur. There can be nothing more detrimental to such a program than to have it fail in its essential purpose. The continuing financial strength of any employer wishing to self-insure its workers’ compensation liability is not only important to the division, but it is equally important to every other employer wishing to avail itself of this privilege.

An important thing for all employers to remember, whether you’re already self-insured or whether you’re thinking about applying for approval, is that self-insurance is a privilege of substantial value. It is a privilege that must be vigorously supported and conscientiously protected. The privilege carries with it certain attendant responsibilities, the most obvious and important of these being to insure that all legitimate claims are paid.

There is a trend for self-insurance participation to grow when insurance markets are “tight” and premiums become high. When an organization considers self-insurance, however, its advantages must offset even the most competitive insurance prices. Organizations must be careful not to get caught up in the rush to self-insure. They should look at all aspects of self-insurance before deciding.

The growth in the number of self-insureds certainly does not mean that self-insurance is the answer for all organizations. There is no doubt, however, that for many companies and public entities, self-insurance can offer significant advantages.

There are many reasons an organization might want to self-insure. Some of these reasons might include:

  1. a desire for improved claims control;
  2. improved public relations;
  3. cost savings;
  4. improved and less expensive coverage in the excess market; and
  5. an inability to obtain coverage elsewhere.

The decision to self-insure is far from a one-step process. It should not be made just because an organization feels self-insurance might cost less than buying insurance. As with any other management decision, the self-insurance decision must be carefully examined and all considerations evaluated fully. Managers must examine the factors critical to the self-insurance decision and focus not just on quantitative, but also the qualitative factors. Management must realize that there can be many reasons a seemingly ideal subject for self-insurance is far from suitable, and that moving in and out of self-insurance programs is not only costly, but can pose other substantial risks.

Under a self-insured program, an employer accepts primary financial and administrative responsibilities of work-related injuries to employees without the intervention of insurance companies. The disadvantage is that if you are not successful you could quite easily find yourself in worse shape than if you had just bought insurance through the voluntary market in the first place.

Companies wishing to self-insure their workers’ compensation risks must meet certain financial criteria before applying for approval of a self-insurance certificate. Rule 480-5-2-.02 (5)(a) of the Alabama Alabama Department of Labor Administrative Code states than “an applicant for a certificate of authority to self-insure, other than municipalities or political subdivisions, must have and maintain, at all times, a net worth of not less than $5,000,000, a current assets to current liabilities ratio of at least 1.0, and a positive net income for the past three years, shown on the submitted audited financial statements.” When applying, a non-refundable application fee of $500 must accompany the application.

Other cost factors to consider:

Self-insured entities are required to submit to the Division an audited financial statement every year. The Division will not accept a reviewed financial statement. There may be substantial cost differences in having an audited statement versus a reviewed one.

Self-insured entities are required to submit to the Division an actuarial study every three (3) years. An actuarial study shows current and projected workers’ compensation losses for your company. These studies can be costly, depending on the size of your company and the actuary hired by you to perform the study.

Every self-insurer is required to be a member of the Alabama Workers’ Compensation Self-Insurers Guaranty Association. The amount of your membership in the fund is dependent on certain factors.

Specific excess insurance coverage is required from all self-insurers with a retention amount of $250,000 or greater.

Claims-handling costs – whether you choose to use the services of a third-party administrator or handle claims in-house.

To receive an application and a complete copy of the Alabama Rules for Self-Insurance, please contact Bertha Bonny at 1-800- 528-5166.