Workers' Compensation Self-Insured Group Programs

Self-Insured Groups (SIG’s) are unique insurance pools that present member organizations with both benefits and risks.

In the current economy, many organizations are looking to SIG’s as a way to reduce their Workers’ Compensation premiums dollars in a program that will provide long term rate stability in the California Work Comp market, which has historically been volitale and unpredictable. While SIG’s can be a great long term solution for well performing organizations who want to have more control of their rate fluctuation, they can also pose many risks to the member organizations which are not present in the guaranteed market. We believe any organization considering entry into these programs should be acutely aware of these risks. Further, it is critically important that a nonprofit's Board of Directors understand and sign off on these risks.

SIG’s are successful when they adhere to the following principles and risk management components:

  • SELECTIVITY: Without a thorough underwriting process that only allow organizations into the SIG which demonstrate predictable losses, solid financials, excellent management, low risk of losing funding and a strong commitment to loss prevention, the financial stability of the program can be compromised. If a SIG provides proposals on virtually any nonprofit that requests a quote, then the risk of instability increases substantially and may not be worth taking.

  • PROPER REINSURANCE PROTECTION: SIG’s must carry “specific” reinsurance that kicks in after a claim reaches a certain loss level (typically $500,000). However, a financially prudent SIG will also purchase “aggregate” reinsurance to protect against the sum of all claims in a given policy year exceeding an aggregate loss level. Without this “excess”, the SIG is significantly more risky. It is important that the “specific” reinsurance be statutory in nature (i.e., not having a limit). If the “specific” reinsurance does have a limit then this is an additional risk to consider.

  • CONTINUED EVALUATION OF MEMBERS: Similar to the principle of selectivity, a SIG must regularly terminate the membership of poorer performing organizations. This improves the stability of the SIG and overall performance. It is critically important that this be done in difficult economic environments as many smaller nonprofits are at risk of losing funding and being unable to pay premiums. In addition, if further liabilities must be covered then the remaining members will have to fund these as well.

  • PAYROLL ALLOCATION AND ANNUAL AUDITS: SIG’s have the ability to allocate payroll across class codes differently than insurers regulated by the Department of Insurance. However, allowing members agencies to allocate payrolls without an annual audit to verify the legitimacy of those allocations can be dangerous and present additional financial liabilities to the group members. In the worse case, it results in fewer premium dollars being collected and increases the probability of future assessments being made against member organizations.

  • FINANCIAL STRENGTH OF SIG MEMBERS: Over the past two years, the recession and California State budget challenges have reduced funding to many nonprofits. Many of those agencies have declared bankruptcy and ceased operations. If this were to occur to a member in a SIG, then the remaining members would be responsible for funding the unpaid premiums. After all, the claims generated by the employees of that failed agency (which are still open) need to be paid.

  • JOINT AND SEVERAL LIABILITY: Members are jointly and severable liable for one another and for the Group. If one Group member goes bankrupt, the rest of the group must cover any outstanding unreserved and uncollateralized claims.In addition, a costly claim against one member of a poor safety record may reflect directly on the amount each member pays.

 

As you evaluate the Self-insured Group quote options, we encourage you to consider these issues as this is a multi-year commitment you are making. And, it could have significant financial implications for your organization down the road. The table on the following page outlines specific examples of how non-adherence to the above mentioned principles may impact your organization:

Scenario Impact to Your Organization
SIG’s membership includes many small nonprofits that lose funding and cannot pay premium contributions. The SIG may ask your organization to contribute additional premium to cover the claims for those nonprofits unable to meet their premium obligations. This financial assessment can be made at any time (and well into the future) as long as the claims for a given policy year remain open.
SIG does not purchase reinsurance with “Statutory Limits,” and a catastrophic claim occurs. The SIG pays the first $500,000 of the claim, the reinsurer pays the next $30 million, and then the Group is responsible for any remaining costs. If a natural disaster were to hit Group members, then it is possible that (without Statutory Limits) most of the members would go out of business because of the financial burden placed upon them.
SIG does not purchase “aggregate” reinsurance and the Group experiences high claim costs in any one year. The SIG membership is responsible for paying that year’s claims, no matter how high the costs go
SIG allows members to determine on their own, the allocation of payroll between class codes and then does not audit these allocations for appropriateness. The SIG members may inaccurately allocate payroll into lower cost class codes, thereby resulting in not enough premium contribution being collected. This, in turn, could result in an assessment being made sometime in the future.