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What is Self-Insurance?

Concept

The concept of self-insurance for Workers’ Compensation in New Hampshire is not new.  There have been self-insurance groups in New Hampshire since 1979; the NH Automobile Dealers Association and Compensation Funds of New Hampshire, now Primex3, are two of the oldest. They count several hundred cities and towns and auto dealers as their members and they represent approximately $20 million dollars in annual premiums. There are currently eight Self-Insured groups in New Hampshire.

A Trust or Self-Insured Group (SIG) functions in a very simple manner. All of the members pool their premiums to pay the workers’ compensation claims of all the members of the SIG as well as the expenses of running the SIG  All collected premiums are deposited into interest generating accounts where they reside until needed, and any investment income generated belongs to the SIG, not an insurance company.

Any premiums and investment income for a given policy year that are not spent on claims and expenses, become available to be returned to the Members of the SIG beginning two years after the close of a policy year. Most of the SIGs in New Hampshire return excess premium over a three to ten year schedule. The actual schedule is determined by the SIG Board of Directors and is approved by the State Labor Department.

How A SIG Works

A SIG is established by its Founding Members—the group that actually starts the SIG. The group must also pass financial and actuarial review that states that the group is financially viable as a SIG.

Once established, a SIG functions much like a corporation. A Third Party Administrator, in this case, The Lawson Group (TLG), acts as the Administrator to run the SIG. Founding Members elect a Board of Trustees and TLG reports to the Board. For all practical purposes, TLG handles all issues that need to be addressed by the SIG. The services include claims management and loss control services, business-related issues including all financial and bookkeeping services related to running the SIG from creating financial reports and making daily deposits to paying claimants, providers, and vendor bills. In addition, TLG solicits and negotiates all contracts and services from Actuaries, Accountants, Lawyers, Insurance Brokers, and Payroll Audit Firms.

There are typically several committees that are involved in operating the SIG to make certain that the wishes of the SIG are maintained. Most of the SIGs have at least an Underwriting Committee to review new members, an Investment Committee to establish and review investment guidelines for the SIGs money, and a Claims Committee to review higher dollar claims for lump sum settlements.

Most SIGs have quarterly board meetings, an annual social meeting and infrequent committee meetings. Involvement for a Board Member is usually about three to five days per year.

How A SIG Protects Itself

All of the New Hampshire SIGs have catastrophe or stop loss insurance.  This limits the liability of the SIG to the value of the policy.  For example, if the SIG has a stop loss policy for $1,500,000, the SIG would only be responsible to pay the first $1,500,000, of a claim and the excess insurance company would pay the remainder.  TLG has run a manufacturing SIG since 1995 and has never had a claim cost more than $1,500,000. 

SIGs generally also have Aggregate Stop Loss insurance during their start up period, but once they are financially stable they no longer need it nor does it make financial sense to carry it. The terms and levels of this insurance can vary widely, depending  upon the make-up of the SIG and are generally unnecessary but practical because they provide an extra layer of security for the SIG.

Why A SIG Works Better

In most cases, the service is better and more concentrated in SIGs than it is in commercial insurance. Claims are generally managed in SIGs and processed in commercial insurance.  Since all members that enter SIGs have to meet fairly stringent criteria, they are starting with companies that are more attentive to the fact that workers’ comp is a highly controllable cost.

Most SIGs provide more aggressive and proactive loss control services and treat all claims aggressively. Legitimate claims are handled expeditiously with proper medical and rehabilitation care where needed to return the injured worker to work as soon as it is possible. Questionable claims are denied and/or aggressively pursued using private investigators and attorneys.

A measure of success for the performance of an insurance company or SIG is their Loss Ratio.  A Loss Ratio is the ratio of dollars paid out in claims divided by the premium dollars collected. The typical loss ratios for commercial insurance companies in New Hampshire have historically run between 80% and 100% or higher. Due to the significant discounting that has occurred in the last several years, many insurance companies are now reporting loss ratios of 125% and higher.  That means that they are losing 25 cents on every dollar of insurance they are selling.

Loss ratios for the SIGs in New Hampshire typically average about 40% to 50%.  TLG has an average of about 35-45% for the manufacturers’ SIG we have operated since 1995. Based on these numbers, it should be easy to see how belonging to a SIG can save money.

Why Membership Makes Sense

As a member of a SIG, you own your own insurance company. Who better to buy from?  You have far more control over the way the insurance program is administered and delivered. There is a higher level of service in all aspects of the insurance program and all this leads to more stable, lower rates. 

Membership in a SIG gives you much better control over the high cost of workers’ compensation insurance for your company and is generally considered to be the least expensive workers’ compensation you can buy over the long haul.