The Ins & Outs
Of Self-Insurance
Southwest Actuarial Forum
December 4, 2007
Ed Costner, ACAS, MAAA
Casualty Actuarial Consultants, Inc.
The Ins & Outs of Self-Insurance
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Definition of Self-Insurance– retain some portion
of the risk of loss
Lines of Coverage to Discuss
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Workers Compensation
Liability Insurances
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General Liability
Professional Liability
Auto Liability
The Ins & Outs of Self-Insurance
Workers Compensation
Three Choices for Coverage
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Qualify to be Self-insured
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Must qualify on a state by state basis
Terms between the S-I and each state where they qualify
Provide evidence of financial responsibility
Provide evidence of acceptable excess insurance
Must collateralize retained losses to each state
Must report to each state annually
Buy a policy from a licensed, admitted insurance
company
Group Self-Insurance
The Ins & Outs of Self-Insurance
Workers Compensation
Other Features of Individual Self-Insured WC
- Acquire excess insurance
- Report on retained losses to each state (actuarial
reports?)
- Select TPA
- More control over loss adjustment
- Loss control and safety
- Financial issues
- Federal income tax issues
- Guaranty fund(s)?
- Long term financial commitment
Extra Credit Problem!
The Ins & Outs of Self-Insurance
Workers Compensation
Buy A Policy – Agreement between the insured & insurer
- Retrospectively Rated
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Specific & aggregate retentions
Basic charge
[(L x LCF) + B] x TM
Provide collateralization for the retained losses to the insurance
company
Incurred loss and paid loss retros
Financial Issues
‘Bundled’ vs. ‘Unbundled’
- Deductible Policies
- Reinsure your insurance company into your captive
The Ins & Outs of Self-Insurance
Workers Compensation
Deductible Policies
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Same issues as retros
Primarily designed to avoid premium tax
Captive Reinsurance
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Must establish a captive insurance company
Front company insures the risk
Captive reinsures the front company only for the losses within its
retention
Retention agreement between captive and front
Captive (unauthorized reinsurer) must collateralize assumed
losses to the front (Schedule F)
Captive is subject to regulation by state or country of domicile
Extra credit problem!
The Ins & Outs of Self-Insurance
Workers Compensation
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Group Self-Insurance Funds
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Organizations agree to pool the risk of loss
Enabling legislation - ‘Sponsored by an association in business
for purposes other than insurance in (state) for more than five
years’
Members have joint and severable liability
Excess insurance required
Rules of operation set by each state
Members are charged a premium and participate in profits and
losses (assessments)
Fund purchases services from vendors
Similar to an insurance company except that the surplus of the
organization includes the members’ net worth
Zero sum game
The Ins & Outs of Self-Insurance
Workers Compensation
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Services Required by Group Self-Insurance
Funds
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General Administration including premium billing,
collection, and financial records
Claims Administration including medical fee review
Safety and Loss Control
Investment Services
Actuaries
Outside CPAs
Figure 1
SAMPLE SELF-INSURER A
WORKERS COMPENSATION
HISTORICAL PROFITABILITY ANALYSIS
(Losses Limited to Prior Specif ic and Aggregate Retentions Including ALAE)
Premium Rate
Pure Loss Rate
Expenses Rate
Amount Per $100 Pay roll
$3.00
$2.50
$2.36
$2.28
$2.09
$2.02
$2.20
$2.15
$2.00
$1.85
$1.77
$1.73
$1.50
$1.48
$1.51
$1.45
$1.34
$1.44
$1.36
$1.32 $1.33 $1.31
$1.28 $1.27
$1.07
$1.18 $1.16
$1.14 $1.16
$1.15
$1.12
$1.00
$0.90
$0.85 $0.85
$0.50
$0.00
6
-0
5
-0
05
1/
1/
4
-0
04
1/
1/
3
-0
03
1/
1/
2
-0
02
1/
1/
1
-0
01
1/
1/
0
-0
00
1/
1/
9
-9
99
1/
1/
8
-9
98
1/
1/
7
-9
97
1/
1/
6
-9
96
1/
1/
5
-9
95
1/
1/
4
-9
94
1/
1/
3
-9
93
1/
1/
2
-9
92
1/
1/
91
1/
1/
Policy Period
HISTORICAL PROFITABILITY ANALYSIS-PER $100 PAYROLL
(Losses Limited to Prior Retentions)
(Excludes Investment Income, Income Taxes, and Dividends)
Earned Premium
Operating Expenses
Estimated Ultimate Losses
$3.00
Per $100 of Payroll
$2.52
$2.50
$2.31
$2.04
$1.98
$2.00
$1.85
$1.81
$1.71
$1.55
$1.69
$1.63
$1.67
$1.51
$1.50
$1.45
$1.34
$1.17
$1.26
$1.11
$1.10
$1.00
$0.50
$0.00
1/1/95-96
1/1/97-98
1/1/96-97
1/1/99-00
1/1/98-99
1/1/01-02
1/1/00-01
Policy Period
1/1/03-04
1/1/02-03
The Ins & Outs of Self-Insurance
Liability Insurances
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Ways to Self-Insure
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Deductibles
Self-insured retentions
Retros
Captive Reinsurance
Self-Insurance Groups
Risk Retention Groups
Limited only by certificate of insurance needs
Extra Credit Problem!
The Ins & Outs of Self-Insurance
Liability Insurances
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Risk Retention Groups
Federal enabling legislation
 Licensed and regulated by state of domicile
 Authorized to write liability insurance in all states
 Some insurance departments HATE RRGs
 No guaranty mechanism
 No WC, no property (currently)
 Since surplus is required – stock or mutual
 Profits belong to the owners
Extra Credit Problem!
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