Workers’ Compensation rates are the highest they’ve been in a decade and there’s no meaningful relief in sight. With workers' compensation costs rising, more and more medium to large employers are considering self-insurance. An effective way to mitigate your exposure to those unpredictable costs is to self-insure, either individually or with a group of like-kind-and quality employers.
In 1994, the California Legislature authorized groups of private employers to form Group Self-Insurance programs for their workers’ compensation liabilities. Because open rating was also allowed 1995, causing rates to decline to historic lows over the next few years, employers did not begin to take advantage of this money saving opportunity until 2002, when the first group workers’ compensation program was approved. Since then, more employers have decided that taking control over this portion of their responsibilities now and for the future, through group self-insurance, is very cost effective.
While this concept is new to the private sector in California, the public sector has taken advantage of the cost savings for decades in the form of Joint Powers Authorities (JPA). Cities, counties and various other public entities have pooled their risk and financing to make sure product is available and more affordable. The private sector model is based on this very successful historical public track record.
The historical development of the Public Sector model is made up of three major components:
- Loss prevention
- Loss reduction
- Loss financing
Loss prevention in public entities was almost unheard of until the 1970s. Most claimants simply did not have a cause of action against public entities, either because of sovereign immunity or a lack of standing to sue local units of government. Insurance was cheap and plentiful, coverage was first dollar, and nobody really had any understanding of what caused claims, let alone what to do to prevent losses.
However, three things happened in the 1970s that changed the insurance landscape for public entities. First, a cyclical downturn in the commercial insurance market drove up the price of insurance. For most public entities, this resulted in some cases, a doubling of their insurance costs, especially workers' compensation.
Second, a series of U.S. Supreme Court decisions changed the legal relationship between local governments and their citizens, including their employees. These decisions expanded the definition of a "person" under the U.S. Constitution to include local governments, thus making them liable for injuries caused by the execution of municipal policies or customs. With this one change, lawsuits flooded public entities and forever changed the duty that public entities owed their citizens.
Third, a change in the workers' compensation laws in several states forced public entities to bring their injury programs under the state Workers' Compensation Act. As a result, public entities started crafting their own responses to the new dynamics of the insurance marketplace. Forced by circumstances, local governments created pragmatic solutions. The most notable of these solutions was the public risk pool, which created a means by which public entities could band together and assume many of the duties and responsibilities of an insurance company. In spite of gloomy forecasts by industry experts, public entity pooling grew to replace a substantial portion of the commercial insurance market for public entities.
Large local governments soon discovered that they didn't need to join a pool to enjoy the benefits of the law of large numbers. Those entities found that their potential claims could be predicted with a high degree of accuracy. Consequently, they began financing their own claims using a combination of self-funding, excess insurance, and even risk management bonds.
Once self-insurance and pooling took hold, public entities soon discovered that the ability to pay their own claims was not good enough. They came to understand that preventing losses in the first place was the key to the long-term success of these alternatives to commercial insurance. As a result, governments began hiring risk managers to identify, measure, and treat risk exposures across their various departments. The International City/County Managers Association helped form the Public Risk Management Association to lend guidance and clarity to this important new role. Well-designed self-insurance programs began to substantially reduce local governments' total cost of risk.
After a few years, commercial insurance became more available and more affordable for local governments. Many of these governments subsequently analyzed the three viable options--commercial insurance, self-insurance, and pooling-to determine which best suited their needs. The conventional market still appealed to many entities. As time passed, however, more and more medium and large governments saw a decided advantage in the self-insurance programs and sought risk management professionals to guide their operations. For many others, pooling was to be the long-term solution to conventional market volatility.
Today, approximately half of all public entities in the U.S. are participating in some form of insurance risk pooling. Affinity Group Administrators has in-depth experience in the public sector with hands-on administration and Board responsibilities with some of the largest JPA’s in California.
There are many reasons why employers might choose to follow the success of the public sector and become self-insured for workers' compensation.
For those that have been self-insured for a few years, the leading advantage is control, although the financial considerations still play an important role in the self-insured plan.
Even in good times, insurance represents a sizeable portion of an employer's expense. Additionally, every year management must devote a substantial amount of time to obtain the best price for workers’ compensation insurance, which has now been made even more difficult because of the large number of workers’ compensation carriers that have recently gone out of business.
Through the years, various methods of risk financing have been devised. Some have lasted relatively intact. A retrospective rating plan, for example, looks back at the final contract experience in order to make adjustments for experience, and has remained an alternative to the straight forward guaranteed cost plan. Various deductible programs are also more common in the marketplace as well. The problem with these continues to be they all rely on the insurance industry to provide pricing stability and product availability for the short term and, more important, the long term.