Self-insurance vs. Traditional Workers’ Compensation Policies

When managing workers’ compensation, employers may have two primary options: self-insurance and traditional workers’ compensation policies. Self-insurance means that the business pays for claims as they occur, rather than paying a premium to an insurance company for coverage. It’s important to note that not every business may be allowed to self-insure their workers’ compensation program, and some states disallow it altogether.

Overall, each approach has its own set of advantages and disadvantages, making it crucial for businesses to evaluate their needs and capabilities carefully.

Pros and Cons of Self-Insurance

The following are the potential benefits of self-insurance:

• Cost savings—Self-insured employers pay claims out of pocket, which might lead to significant cost savings compared to paying premiums to an insurance carrier.
• Control—Employers have greater control over claims management and can tailor their programs to fit their specific needs better.
• Improved loss experience—With direct oversight, employers can implement more effective safety measures and loss prevention strategies.

The following are the potential disadvantages of self-insurance:

• Financial risk—Self-insurance involves bearing the entire financial burden of claims, which can be unpredictable and potentially overwhelming.
• Administrative complexity—Managing claims and complying with state regulations requires substantial administrative effort and expertise; however, self-insured businesses may contract with a third party for plan administration.
• Collateral requirements—Self-insured employers must provide collateral to cover potential claims liabilities, which can tie up significant financial resources.

Pros and Cons of Traditional Workers’ Compensation Policies

The following are the potential benefits of traditional workers’ compensation policies:

• Risk transfer—The insurance provider typically assumes the financial and legal risks associated with claims.
• Predictability—Fixed premium payments offer consistent costs, making budgeting more manageable for businesses.
• Administrative ease—The insurer handles all claims processing and compliance tasks, reducing the administrative burden on employers.

The following are the potential disadvantages of traditional workers’ compensation policies:

• Higher costs—Premiums for traditional workers’ compensation policies can be higher than the costs associated with self-insurance.
• Less control—Employers have limited influence over claims management and vendor selection, which can lead to less customized solutions.
• Potential for overinsurance—Some businesses may end up paying for coverage they don’t fully utilize, leading to inefficiencies.

Learn More

For workers’ compensation insurance guidance near you, contact Always Insured.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.