With the rising cost of group insurance plans premiums, more and more business are switching to self-insured medical and short-term disability insurance plans.
With a self-insurance plan, an employer will keep a reserve of funds to cover their employee’s health, medical and disability expenses. By doing this, the employer doesn’t have to buy group insurance and pay monthly premiums to a third-party insurance company.
There are several advantages and disadvantages of self-insuring your business. We’ll start off by looking at some of the advantages first and then look at the disadvantages.
The most obvious advantage of self-insuring your business is the fact that you’re not paying out premiums to an insurance company regardless of whether your employees are actually filing claims or not. For example, if your business pays out $50,000 a year in group insurance premiums and your employees only claim $10,000 one year, your business just took a loss of $40,000 that year.
If you had instead set aside that $50,000 in a self-insurance reserve fund, you would have ended the year with a surplus of $40,000 in your reserve fund. That amount could have gone towards contributing to next year’s fund or for another purpose.
A disadvantage of buying group insurance from an insurance company is the risk of having your future premiums spike if your business’ claim costs increase during a year. Insurance companies selling health, medical and disability insurance normally have a set Target Loss Ratio (TLR). If your business’ claims costs exceed your insurance company’s TLR during a year, they will increase your premiums for the following year citing trend and reserve factors.
On the other hand, being self-insured means that your future insurance costs aren’t influenced by TLR or trend and reserve factors. So, if your business’ insurance claims costs increased this year, you won’t be punished for it next year.
Another advantage of self-insuring your business, is that you’re not paying any extra or hidden fees in your premiums or during the claims process. For example, many insurance companies will charge you administrative fees whenever you file a claim. These fees can account for as much as 10-15% of the claim amount.
These are just some of the advantages of making your business self-insured. On the flip side, there are also a few disadvantages and difficulties that you may face if you decide go this route. Let’s take a look at these.
One of the biggest disadvantages of self-insuring is taking a risk of having a bad claims year. Quite simply, can your organization afford to self-insure itself during a year when claims may be double or even triple in cost than they were the year before?
For example, if your business has set aside $50,000 at the start of the year as a self-insured reserve fund, can it afford to pay out an additional $50,000 if the cost of claims is higher during that year? If your business can’t take the risk of this happening, then it’s probably not a good idea to self-insure. Alternately, you could also buy stop-loss insurance to prevent this scenario. Stop-loss insurance pays out once an employer’s self-insured reserve fund is depleted. Coverage costs for this insurance are calculated based on the number of people employed by your business.
Another difficulty of self-insuring your business, is handling the claims process in-house rather than having an insurance company deal with it. These insurance companies have professional experts who can accurately investigate and adjudicate a contentious claim. They can also serve as guides for your employees during the claims process.
By cutting out the insurance companies, you will have to entrust this work to your human resources department who may not be qualified for the job. Having an employee of your company rejecting the insurance claim of a fellow employee could also to lead discourse and conflict within the organization. Unqualified employees handling insurance claims could also cause your business financial liability if they accept fraudulent claims without investigating them properly.
This problem could be solved by hiring an independent third-party case management service that could adjudicate your employees’ claims and authorize the release of reimbursements. In this case, your business would simply have to contribute to the reserve fund and let this third-party service work on a case by case basis.
If you own a medium or large-sized business with an established yearly claiming pattern, then investing in a self-insurance plan could be a good idea for you. This would save you the money that you would normally lose paying out premiums to an insurance company. Just consider hiring a third-party case management service to handle the claims cases if your in-house human resources department isn’t qualified enough.
If you’re a small business with not a lot of funds, then maybe it’s a better idea to go with the safe route and buy a group insurance plan from an insurance company. This will ensure that your employees will be covered even if the claims costs suddenly spike up. If you do decide to self-insure as a small business, then buying safe-loss insurance should be a must.
At the end of the day, self-insuring is an option that all businesses that currently buy group insurance plans should take a look at. It’s worth emphasizing again that going this route has its advantages and disadvantages though. Make sure that you do your research and are aware of your business’ financial situation before you make a decision.
