When selecting workers’ compensation coverage, employers may choose a fully-insured or self-funded plan, or they may participate in a self-insured group.
Fully-insured workers’ compensation
Under a fully-insured plan, employers pay a premium to an insurance carrier. In exchange, the insurance carrier assumes the financial and legal risks, paying all claim-related expenses. The benefits of this type of arrangement include:
Self-insured workers’ compensation
In a self-insured workers' compensation plan (also called a self-funded plan), employers assume the financial risk of providing workers’ compensation benefits to employees. Instead of paying a premium to an insurance company or state-sponsored workers’ compensation fund, a self-insured employer pays each claim out of pocket as they are incurred. The benefits of this type of arrangement include:
For employers that don’t have the size or financial capacity to self-insure on their own but want to have some control over their workers’ compensation costs and benefit from the cost-savings self-insurance provides, a self-insured group (SIG) may be an option. With a self-insured group, sometimes referred to as a fund or trust, employers contribute to a pool used to cover the group’s workers’ compensation claim costs and expenses. If the funds in the pool fall short of actual costs, members could be assessed to cover the additional amount. The benefits of this type of arrangement include:
Not every employer can self-insure
A small number of states do not permit employers to operate self-insured plans. In states that do, employers must be approved by the applicable regulatory agency in order to operate a self-insured workers' compensation plan. To be approved, employers must meet certain solvency standards and provide appropriate actuarial reports.
Understand the risk
Employers should carefully weigh the differences among self-insured, self-insured group, and full-insured workers’ compensation insurance. Because a self-insured employer assumes the risk of paying the workers' compensation claim costs for its employees, it must have the financial resources to meet this obligation. Further, when considering a self-insured group, employers need to understand how the program works, the financial strength of the group, and how the group is managed.
Every company has different needs and goals. Finding the right plan requires an in-depth conversation with an experienced advisor who can help you understand your options and help you determine which one best suits your needs.
Self-insurance Institute of America, Inc.