Companies can use self-insuring as an alternative "risk management" strategy by setting aside a calculated amount of money each month to cover potential future costs instead of purchasing insurance. Larger companies tend to adopt modified self-insurance strategies for health care because there are benefits to both the company and its employees. Self-insurance lets a company provide tailored programs to meet the special needs of their employees better than a "one size fits all" insurance offering, and there are financial benefits that can reduce the overall cost of the program, resulting in lower payments for both the company and its employees.
To understand modified self-insurance, you need only imagine an insurance plan that comes with a deductible of millions of dollars. What happens is that the company retains the risk for the "predictable" losses and purchases a "stop-loss" insurance policy to cover losses beyond the selected limit. The higher the stop-loss limit, the less expensive the stop-loss policy becomes.
Law of Numbers
The law of large numbers--sometimes called the law of averages--requires a group of people large enough to allow a statistically accurate estimate of future liabilities, or costs. Briefly, the law says that the larger the group, the more predictable its behavior and the closer predicted averages will match actual averages. Self-insured companies use the law of large numbers plus actuarial and insurance information to calculate how much they need to put in a dedicated "health care" reserve to cover their future costs, or losses. The amounts that companies, and their covered employees, pay for health care coverage derives from those calculations plus the cost of the stop-loss insurance.
A company can self-insure against any predictable and measurable risk that falls within the range of the law of large numbers, including such things as automobile insurance--for fleet cars--and workers' compensation. The Self-Insurance Institute of America, or SSIA, says companies most commonly self-insure their health care and workers' compensation plans.
Captives and RRGs
In addition to in-house self-funding, some companies create "captives," or insurance companies owned by the insured, or risk retention groups, or RRGs, which are several companies coming together to self-insure their employees as a single group.
Group Health Care
In the year 2000, of the 150 million workers covered by employer health plans nationwide, 50 million (33 percent) of those workers and their dependents received benefits under self-insured health plans. By self-insuring, employers not only can customize their plans to meet the specific health care needs of their work force, but also maintain control of the health plan reserves and keep the interest earned on the money held in reserve. Finally, since federal law regulates self-insured health plans, a company with employees located in many different states isn't required to comply with conflicting state health insurance regulations or taxes.