Private Carrier vs. Self-Insured Group: what you need to know
If you don’t fully understand self-insured groups (SIGs) for worker’s compensation coverage, you’re not alone. Seventy-three percent of small businesses report that they have little or no knowledge of how SIGs work.
One common misconception about SIGs is that you have more control over your insurance costs than you would if you purchased a policy from an insurance company. The truth is that you may have less control over your insurance costs by joining a SIG.
The ABCs of SIGs
When businesses pool together with other companies to meet their workers’ compensation obligations, they are forming a SIG. The companies in a SIG opt out of traditional private insurance coverage. Instead, they join with other businesses to share financial responsibility for claims made upon all members of the group.
Premiums are paid into a pool, based on a computation of expected losses for the group. A third party administrator (TPA) is typically hired to manage claims and medical services. Sometimes a SIG may qualify for self-management, handling administrative functions for itself in conjunction with regulatory requirements.
The members of the SIG are responsible for calculating rates and premiums. Since the SIG members generally are not insurance specialists, there is the potential for miscalculations. In many states, SIGs only qualify for authorization when they purchase reinsurance to cover losses that exceed the SIG’s estimation of losses that will be insured. Reinsurance must be calculated into the total cost when evaluating the SIG price tag.
Cost considerations: the long-term view
Cost savings tend to be the attraction SIGs hold for small businesses. Employers believe they will save on premiums versus what a private carrier charges. But, private insurers bring additional services to the covered business. Private insurers provide value-added expertise including sophisticated programs for loss control, fraud control, and managed care. Such programs can contribute to long-term cost savings and should be considered in the purchase decision for something as complex and consequential as workers’ compensation insurance.
How well do you know the other group members?
Thirty-nine percent of small businesses that are current or former SIG members believe they are financially responsible only for the workers’ compensation claims of their own businesses, and not for the claims made against other businesses in the SIG. This belief is incorrect.
The California Alliance of Self-Insured Groups, Inc. (CA-SIG) defines SIGs as cooperatives of like kind and quality employers…which pool the money they would typically give to an insurance company. A self-insured group is a ‘shared-risk’ pool, with joint and several liability among members.
So, In addition to its own loss exposure, SIG members also take on the exposures of each of its fellow members. SIG members rely on other members to take the same safety measures they take, and manage risk as well as they do. SIGs often hold individual members accountable for their claims through increased assessments to that member, and sometimes termination of membership in the SIG. But, even an employer having a good year can face premium increases–because costs are allocated across the group and determined by the risk management performance of all the businesses in the SIG.
Ending your membership: it’s not over when you think it’s over
Twenty-five percent of small businesses incorrectly believe that their financial exposure ceases when they leave a SIG. In actuality, former members remain liable for SIG financial obligations incurred during their membership. The group may retroactively charge members for costs, including assessments for workers’ compensation claims, well after the date of the event. A member who has since resigned from the group is still obligated to pay, and there is no easy way to anticipate and plan for these costs. It isn't easy to exit your relationship with a SIG. It can be complicated and time consuming, with up to 120 days’ notice required.
How much control is enough?
With SIG membership, you may initially pay a lower premium, but you have less control over the total cost of your workers’ compensation coverage because:
- You pool workers’ compensation risk with other small businesses whose workplace safety, risk management, and financial practices may be unknown to you.
- our SIG may make business insurance decisions without sufficient expertise.
- You can’t anticipate your long-term liabilities, since you have a financial obligation to pay costs the group incurs during your coverage period, even if you receive such assessments after your resignation becomes effective.
With all things in life, there is some level of risk involved. But when it comes to workers’ compensation the goal is to eliminate as much opportunity for risk as possible. You could initially pay a higher premium. However, you avoid the additional potential exposures presented by SIG membership when you choose a traditional workers’ compensation carrier. Additionally, your workers’ compensation claims, loss control, anti-fraud program, and medical care management are being handled by insurance experts. Evaluate the pros and cons of both options for coverage and make an informed decision on what best fits your business goals.
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