Workers Compensation Self Insurance Plans
Ultimately, the lowest fixed cost mechanism is to self-insure. It also involves the greatest level of risk and regulatory and administrative duties and responsibilities that can be burdensome. It requires state approval in each state where an account wishes to self-insure. An account must apply to be a qualified self-insurer to The Office of Self Insurance Plans, a division of the State of Florida Department Of Insurance. In Florida, the process takes a minimum of four months, but routinely takes six to twelve months for approval. The minimum requirements are:
- $5 million shareholder equity or $5 million fund balance for non-profits
- Average net profits of $500,000 per year for the last five years or,
- $500,000 in revenue over expenses for non-profits for the last five years
- Certified, audited financial statements
- Lowest fixed costs
- Maximum use of cash
- Maximum control over claims
- Experience tends to improve
- Governmental regulations, controls and monitoring
- Highest degree of risk
- Requires substantial commitment in resources and manpower
- Difficult in multi-state situations
- Ties up credit and capital to the greatest extent
A security deposit equal to 135% of the future liability for payments must be posted,
This may be in the form of a surety bond, approved securities or a letter of credit. For the first three years, an approved third party administrator must administer claims.
After three years, the account may adjust its own claims, but are subject to twice a year administrator's exam and all laws and penalties for claims administration.
Fixed expenses are the lowest in a self-insured plan.
There is no need to pay a fronting carrier.
Reinsurance costs can be lower because of reduced transaction charges.
The cash flow has the maximum advantage, as claims are paid over a long period of time.
There are tax implications and accounting implications.
Whereas 100% of workers' compensation premium is tax deductible, the self-insured may only deduct: 1) premiums for excess insurance; 2) actual claims payments; and 3) expenses for administration, including claims administration.
The reserves for future payments must be shown on financial statements, but cannot be deducted for tax purposes.
This creates some significant issues in the early years, but levels out over time.
All security and regulatory issues remain until all future liabilities are satisfied, even if the account opts out of self-insurance.
This can tie up a major capital investment for many years.
Advantages
Disadvantages