By Mark Wilhelm, CEO of Safety National
Over the years, the popularity of self-insurance has grown steadily. When rates for primary insurance skyrocketed in the 1970s, companies turned to self-insurance as a more economical way to cover workers’ compensation and many continue to pursue this alternative risk funding option to this day.
Employers that didn’t possess sufficient size or funding to allow them to self-insure alone faced a dilemma that has been solved with the formation of self-insured groups (SIGs). That is, instead of purchasing traditional insurance policies, thousands of private businesses and public entities choose to join together as groups and self-insure their workers’ compensation liabilities so that they could reap the benefits of cost effectiveness, better control over their claims dollars, more efficient return-to-work programs, and increased loss control and safety management.
In today’s economy, well-managed, well-regulated SIGs are still very viable approaches for small employers. Here are some best practices that, if followed, can help ensure long-term success for these groups.
1. Preserve a Strong Foundation Through Planning & Organization
SIGs are dynamic institutions that will only truly thrive if they adapt with what’s going on in the world. This can be accomplished through an annual operations analysis and evaluation, with special focus on one element – does the group continue to meet the purpose in which it was created? It’s very possible that changes may have occurred within the workers’ compensation environment since the association application was first proposed to regulators.
Some important questions to consider in this evaluation are:
- Does the group’s feasibility study still make sense in today’s economic climate or should it be modified?
- Is the group continuing to attract new members that can meet the group’s underwriting criteria or should underwriting modifications be made and proposed to regulators?
- Are the service providers still acceptable to all parties involved – the founding members, the board of trustees, existing membership and regulators?
- Does the plan of operation clearly state the group’s goals and standards so that all service providers, members, the board and other representatives understand them?
Finally, every group should consider establishing an overall governance policy as part of its operation plan. This policy can include standards related to transparency, accountability, responsibility, claw backs, and timely disclosure of material operational issues, internal audits and compliance with legal and regulatory requirements.
2. Select Top Service Providers
It’s important for groups to pre-consider the standards of operation and types of services offered when choosing vendors. In some jurisdictions, service providers must even be approved by regulators before a group can contract with them. Here are some basic performance standards that group audit committees can use to determine if a service provider will provide high-quality service:
- All vendors should maintain a sense of urgency when performing business with group members, the board of trustees and state regulators.
- Service providers should be able to demonstrate that they have the necessary values, successful experience, and attention to quality and detail to allow the group to achieve its stated purpose and goals.
- Each provider should demonstrate that they know, follow, and are in compliance with the state statutes and regulations under which the group operates.
The service providers chosen by a self-insured group are essential to helping the group stay competitive and successful when compared with the traditional market. Analyzing their core competencies prior to selection is a great practice to help ensure they are up to the task.
3. Foster Regulatory Relationships
Because regulatory issues are diverse in scope and may seriously impact the function of a group, it is important that self-insured groups foster a relationship with appropriate regulatory authorities as soon as possible after formation. When the group has established a professional business relationship with a regulatory authority, a better, more-thoughtful and open dialogue can be developed.
Just one meeting a year with the regulator at their office is, generally, not enough to establish an effective relationship. The self-insured group should consider finding other means to interact with their regulators. This can include:
- More involvement with the state self-insurance association.
- Attending a self-insurance conference.
- Sitting on a regulatory subcommittee for self-insurance.
- Being prepared to make a public comment upon a proposed state statute or regulation that affects self-insurance.
- Working with a state legislator to sponsor a statute related to a safety practice for members in a group.
It is more important than ever that self-insured groups find positive ways to interact with regulators or legislators.
4. Maintain Financial Solvency
Today’s economic conditions demand that self-insured groups maintain adequate financial resources to meet or exceed any solvency requirements. While most states require that financial exams be conducted every three years, best practices indicate that a thorough financial review be completed annually to determine the condition of the SIG.
A group’s first step is to meet the capital requirements found in the self-insurance legislation of each state. Once minimum capital requirements have been met, a group can assess ongoing expenses and estimated losses for the membership. The group should consider utilizing an actuary with expertise in group self-insurance operations to provide an estimate of outstanding liabilities for a reporting year and the ongoing funding needs required to cover those liabilities.
Actuarial assumptions must be tested to determine if they remain valid. In order to properly determine this, all exhibits to the annual actuarial report must be completely understood. The board of trustees, administrator and regulators need to know and understand what transpired in the past in relation to liabilities and funding to help the group better plan for future success.
For SIGs, these best practices are worth taking the time and effort to implement. They represent a means to offer quality service that earns the loyalty of membership and added value that every group can take with them into the marketplace when competing for customers. Regulators usually have a good idea of who the better self-insured groups are within their state. But if they aren’t aware, the SIG that follows these best practices has an impressive story to tell regulators when they do interact. In the end, strategies and standards like these can help create a brand that represents quality, loyalty and success for the self-insured groups that implement them.
About Mark Wilhelm
Mark Wilhelm is Chief Executive Officer of Safety National and serves on the company’s Board of Directors. He joined Safety National in 1977 when the company had approximately $11 million in assets, and led its underwriting operations from1985 until he was named CEO. Safety National is now a leading workers’ compensation insurance provider with nearly $3 billion in assets. Mr. Wilhelm is a regular speaker and panelist at industry conferences regarding self-insurance, workers’ compensation and other topics.
About Safety National
Safety National Casualty Corporation, a versatile alternative market insurance provider that offers a broad range of risk funding products through insurance agents and brokers. Founded in 1942, Safety National is the leading provider of excess workers’ compensation coverage to self-insured employers and groups nationwide, and has provided that type of coverage longer than any other company in the United States. The company is licensed to provide workers’ compensation insurance in all 50 states, the District of Columbia and Canada. Safety National is a wholly-owned subsidiary of Delphi Financial Group Inc. (NYSE: DFG) and is rated “A” (Excellent), Financial Size Category XI, by A.M. Best.
To learn more, visit: www.safetynational.com.