Self-insuring makes sense for companies with high costs. Smaller companies can save by auditing claims closely.
Most company owners fail to realize that self-insuring for workers' compensation costs can be an option. "We generally tell companies they have to be looking at around $200,000 in annual workers' comp costs before it begins to make sense," says Bill Franey, the owner of Franey & Parr, an insurance brokerage in Lanham, Md.
For such businesses -- for example, those operating in industries with high occupational hazards -- self-insurance can take one of two forms:
Pure self-insurance plans, under which companies guarantee they will cover all but the most catastrophic of costs. (Those are covered by an insurance policy that kicks in when claims exceed a given amount.) Usually, a third-party administrator is hired to handle claims follow-up and paperwork. "With these types of plans, companies must apply to the state insurance commissioner for permission to self-insure," explains Franey. They generally must also post either a bond or a letter of credit.
Self-insured retention (SIR) plans, under which companies basically buy insurance with very high deductibles (perhaps as high as $250,000 a claim) and set a cap on total claims payments during the course of the year. "The good news is, they don't have to apply for permission from the state or set a bond, because they're basically just buying a special kind of insurance policy from a carrier," Franey explains. Although with an SIR plan the up-front cost is higher than with a pure self-insurance plan, there are other benefits, including the insurer's administration of any claims and its supervision of workers' safety programs.
The downside to self-insuring workers' comp is that it is complicated. Also, "failure to comply with your state's guidelines -- even the late payment of a claim -- can result in significant fines," warns Glenn Wille, a consultant at Grant Thornton's Appleton, Wis., accounting office. Working with a third-party administrator -- an accounting firm, insurer, or insurance brokerage -- can help managers navigate the regulatory jungle.
If your company is too small to consider self-insurance, here's another option: get more aggressively involved in the way your insurance company handles workers' comp claims. "Insurers like to carry high reserves against claims, but clients need to audit those reserves to make certain the carrier isn't holding on to more money than necessary," advises Wille. All you need to do is ask how much of your money is being held in reserve, and why. "It also pays to get involved in investigating cases where you suspect a claim might not really relate to a workplace accident. I've seen cases where that has saved companies large sums."