Is it Cost Effective to be Self-Insured?

What is Self-Insurance

Self-insurance is a system in which the employer assumes the financial risk for providing Workers' Compensation benefits to its employees. Employers that are self-insured pay the costs for their claims as they are incurred, and they only pay the costs of claims of their own employees--never the costs of other employers' claims. This is the key difference between self-insurance and a state-sponsored system. In a state-sponsored insurance system, the employer pays a fixed premium into a fund that pays the costs of not just their own claims but the costs all the injury claims in their industry in the whole state.

Benefits of Self-Insurance

Large companies may benefit from being self-insured rather than buying into a pool of state-sponsored insurance. With state-sponsored insurance, employers pay a fixed premium that is based on the following factors: their assigned risk classifications, the firm’s experience factor, and the number of hours worked. The following formulas show how the state calculates an employer’s premium:

Premium Rate (rate per hour worked) =

Employer’s Experience Factor
(Accident Fund Base Rate + Medical Aid Fund Base Rate + Stay At Work Base Rate)
Supplemental Pension Fund Base Rate

Premium =

Premium Rate
Number of Hours Worked

With the latter formula, the costs of state-sponsored Workers' Compensation insurance premiums can be unfairly high for large companies simply because they have a high number of employees who work a lot of hours. In these cases, the state-sponsored insurance may cost more for a large company than just paying the costs of all its injury claims out of pocket. Let's look at an example...

Self Insurance Case Study

A specialty bake shop is assigned risk class 3901-01 (Bakeries – Retail – Specialty Shops). Suppose for 2015, this employer has an experience factor of 1.1300. Let’s further assume that there are 60 full-time workers working 480 hours per quarter which amounts to about 115,000 hours worked per year. The 2015 base rates for risk class 3901-01 are:

  • - Accident Fund: $0.1773
  • - Medical Aid Fund: $0.1676
  • - Stay At Work: $0.0035
  • - Supplemental Pension Fund: $0.0896

Premium rate = 1.1300 x ($0.1773 + $0.1676 + $0.0035) + $0.0896 = $0.4833 per hour worked.
Premium = $0.4833 x 115,000 = $55,580

With state-funded insurance, the bakery pays $55,580 in 2015 for Workers’ Compensation insurance which hardly seems fair given they have an experience factor near 1 and hardly any claims. In fact, the bakery has such a great safety record that there were only 2 injuries this year, costing only $36,000 in claim costs. With state funded insurance, the bakery is paying the going rate for its industry regardless of how well it actually performs in terms of claims. In this case, it would be far more cost effective for this company to be self-insured. The savings for 2015 amounts to roughly $19,580 in this instance. Any amount of claim costs below $55,580 on the year would equal a savings for this company, making it better to be self-insured.

Why Work With Us

Regardless if your company is self insured, state funded or privately insured, we can help you across the United States and Canada.

Get Your FREE Self-Insurance Feasibility Review Now!

See what our services can do for you with our free self-insurance feasibility review. We will determine rate reductions and create a plan of action. Fill out the form below to receive your free review or for more information. We will get back to you promptly.

Self-Insurance Feasibility Review

Get Your FREE Self-Insurance Feasibility Review

See what our services can do for you with our free self-insurance feasibility review. We will create a plan of action, determine rate reductions and identify any additional opportunities. Fill out the form to receive your free self-insurance feasibility review or for more information. We will get back to you promptly.

Please fill out the form below and we will promptly get back to you!

Please enter your name
Please enter your Company's name
Please enter a valid email address