How Is Employer Self-Insurance Different From Buying an Insurance Policy?
The primary reason employers self-insure is to control costs. A self-insured business is financially responsible for costs which would otherwise be covered by an insurance policy. The business saves by not paying an insurance premium. A business can retain all of the risk by completely self-insuring or retain only a portion of the risk by using stop-loss insurance to cover against large losses.
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Function
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The function of self-insurance is for a business to retain risk instead of transferring the risk to an insurance company. The business pays claims from existing funds or from cash flow. Frequently businesses accrue funds as a reserve for future claims.
Types
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A business can self-insure for many types of risk. In addition to health insurance, businesses self-insure for worker's compensation and for liability.
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Features
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Businesses may administer a self-insurance program themselves or hire a third-party administrator (TPA). A TPA can handle all paperwork associated with self-insurance, processing claims, making payments and preparing regulatory filings.
Retention
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Claims can be expensive. Self-insured businesses do not have to retain all of the risk associated with self-insurance. A stop-loss policy can be purchased to pay very large claims over a specified dollar amount or to pay claims if total claims exceed a specified dollar limit. Stop-loss policies allow a business to obtain the cost savings of self-insurance without accepting potentially ruinous risk.
Benefits
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In addition to potential cost savings, businesses can achieve other objectives through self-insurance. Self-insurance is subject to federal (but not state) regulation. A company can bypass onerous state requirements through self-insurance. Companies also have additional flexibility with self-insurance; the company can design a plan to provide benefits of most interest to employees instead of accepting an insurance company's off-the-shelf plan.
Considerations
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Self-insurance is not appropriate for every business. Businesses with limited resources or low cash flow may not be able to reasonably assume the higher risk of self-insurance. Large companies with strong cash flow are better able to finance the variable nature of claims.
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References
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