Ways to tame workers' comp premiums - workers' compensation - Insurance: How Well Are You Covered? - Cover Story

HR Magazine, Feb, 1992 by James A. Swanke, Jr.

5. Group self-insurance participants typically must comply with stringent state requirements.

6. Group self-insurance participants are jointly and severally liable.

Of the above, exposure to joint and several liability is perhaps the greatest disadvantage to group self-insurance. If a participating employer is unable to make necessary contributions to the trust or becomes bankrupt, the other group self-insurance participants must step in to cover any potential shortfall.

Consequently, it is critically important that all employers coming together to form a group self-insurance program are financially sound and viable. Group self-insurance participants should be pre-qualified in terms of both financial and loss-control considerations. In addition, the group self-insurance program should be actuarially funded and excess insurance should be secured on both a specific excess and an aggregate excess basis to further minimize exposure to joint and several liability.

Cost-savings potential

A properly designed group self-insurance program can save participating employers 20 percent to 40 percent of workers' compensation costs. Self-insurance groups, such as the Greater Portland V, a nonhomogeneous group of small-to medium-sized employers in the state of Maine, have saved 40 percent on such costs. Much of this program's success can be attributed to program design, and the group's pro-active support of safety and loss-control programming.

The Archdiocese of Boston, which formed a group self-insurance program in 1990 for Catholic entities in Mass., was able to save 20 percent on its workers' compensation costs by streamlining program administration and eliminating insurer overhead and profit. The five ways in which cost savings are likely to be realized under a group self-insurance program are:

* Elimination of residual market loads. * Elimination of insurer overhead and profit. * Elimination of most brokerage commissions. * Realization of investment income. * Reduction in losses from hands-on loss-control and claim management programs.

Effective group programs

Any self-insurance program, whether for workers' compensation, health insurance or medical malpractice, has inherent risks. Consequently, a methodical approach should be taken in first determining the feasibility of a group self-insurance program and, second, in actually implementing the program. Presented in Exhibit 2 are the recommended steps for implementation.

EXHIBIT 2

Implementing a Group Self-Insurance Program 1. State regulatory examination 2. Data and information collection 3. Actuarial loss forecasting 4. Analysis of loss-funding

alternatives 5. Determination of optimal

program structure 6. Implementation

Perhaps the most important step in implementing a group self-insurance program is the collection of accurate and up-to-date data and information on losses and exposures. From this information, actuaries project upcoming years' losses under a workers' compensation program. Employers may be able to undertake such a study themselves, however, some outside expert assistance will be needed. Typically, cost savings from the implementation of a self-insured arrangement more than offset the cost of the study within the first year.