The cost of worker's compensation insurance premiums has been growing for a couple of years now. In 2014, California topped the list with index rates of $3 to $3.50, followed by New York, New Jersey, Connecticut, Rhode Island, and Oklahoma. During the first half of 2015, premiums were up by 5.3 percent compared to the year before. And this year, the Washington State Department of Labor & Industries said that workers comp rates will continue to rise, with a projected increase of 2 percent.
There are a variety of reasons for the spike in worker's compensation insurance costs. But for companies whose premiums are disproportionate to their losses, no reason is convincing. If you have a great safety track record and you’re still struggling to justify how much you pay for worker's compensation insurance, you may find a solution in the self-insurance trend.
Drive down costs, free up cash flow: How self-insurance works
Companies that self-insure have a greater-than-average incentive to create a truly safe work environment. By preventing claims, you prevent costs.
Self-insurance used to be an option only for enterprise-level companies. That's changing. The self-insurance trend began with health insurance. According to PwC, the number of businesses with self-insured health plans is on the rise. In 2015, well over half of those with 500 to 1,000 employees (66 percent) chose to self-insure. Smaller companies are making the leap now, too. And, now that self-insurance seems more accessible, companies are also considering other lines of insurance like worker's compensation.
What’s changed? Not the risks. Companies that self-insure assume responsibility to cover the cost of worker's compensation themselves up to a defined limit. Rather, it seems that the risks are looming less large. Employers are navigating new obstacles, which alter the cost-benefit analysis. For many, the value proposition is suddenly making sense.
There are also many flavors of self-insured, partially self-insured, captive, and loss-sensitive options so employers and their brokers can structure a solution that exactly suits their needs.
Most self-insured and partially self-insured plans share some common characteristics:
- You define your own administration protocols
- You set aside reserves to pay for projected claims
- Your premium is based on your actual loss experience rather than the shared losses of a risk pool
- If claims exceed the established first layer limit, reinsurance kicks in
- If your loss experience is better than projected claims, you reap the savings reward
Transitioning to self-insurance requires commitment and process
To create a self-insurance program, an employer typically collaborates with a broker and a third-party administrator, and as with everything in the world of insurance, the details are complex. However, the details are only on the surface. A successful self-insurance strategy must be built on a foundation of workplace safety. Here are three areas to focus on, with tips to get you started.
- Make your workplace safe. Review your safety policies and put them in writing. Create an effective safety training program for new hires; solicit honest feedback on how useful your existing training is. Offer ongoing safety education periodically. Conduct random inspections and reward workers who are doing it right. Build safety into performance reviews. Structure all of your education, routines, and incentives to build genuine buy-in.
- Investigate promptly. When someone files a claim, investigate immediately and thoroughly. Prompt investigation can prevent fraud and preempt excessive spending.
- Assemble your dream team. Choose a workers compensation insurance team who has a track record of great outcomes, and who is well-versed in the worker's compensation claims process. Find a broker and third-party administrator whose experience you deeply trust, and work with them to set up a streamlined process for claims management.
Self-insurance isn't right for all companies. But for those who are committed to creating a culture of workplace safety and keeping claims costs down, it can be the tool you need to reduce spend, redirect your cash flow, and support your business objectives.
If your losses are low, and your worker's compensation premium is disproportionate to your claims experience, it may be time to take a closer look at self-insured and partially self-insured options. Need advice? The business insurance experts at Heffernan Insurance Brokers are here to help. Contact us today!