Six Primary Reasons Employers Decide to Self-Insure (Self-Fund) Employee Benefits
1. Reduced insurance overhead costs. Self-insurance removes the risk charge that carriers assess for insured policies (approximately 3% annually).
2. Reduced state premium taxes. Self-insured programs, unlike insured policies, are not subject to state premium taxes. The premium tax savings is about 3% per year in Florida.
3. Choice of state mandated benefits. Self-insured plans are exempt from most state insurance laws, regardless of whether both insured and self-insured plans are governed by State and Federal law (predominantly ERISA). ERISA allows a self-insured employer more flexibility in the design of their benefit program, whereas Florida benefit mandates add considerably to the cost of insured employer benefit programs.
4. Benefit plan control. The self-insured employer can simply instruct their independent claim administrator to revise insured benefits. Typically, employers must negotiate with carriers over benefit changes and the associated cost or savings. In an insured plan, the carrier may be unwilling or unable to make the desired change. Self-insured employers have benefit plan control.
5. Cash flow. Self-insured programs offer cash flow advantages over insured policies, particularly in the year of adoption when "run-out" claims are being covered by the prior insurance policy.
6. Choice of claim administrator. Employers can choose to have either an independent third party administrator (TPA) or an insurance company administer their plan. The employer gains greater cost competition, choice and flexibility. Conversely, only an insurance carrier can administer an insured policy.
How much do employers typically save with a self-funded model?
On average, an employer can save 4% to 12% per year, depending on the differences between insured and self-insured benefit plan design and on the level of stop-loss insurance chosen. Also, in years when actual claims are less than expected, the employer saves the amount of the surplus. In years when actual claims are higher than expected, the self-insured plan cost may exceed an insured plan premium. Note that savings depends entirely on the group of people to be covered.
What are the downsides to self-insurance (self-funded plans)?
The primary shortcoming of a self-funded plan is the volatility of monthly costs. However, having proper stop-loss coverage amounts generally limits the possibility of large annual cost fluctuations. Yes, the employers still assumes greater risk than with an insured policy. Volatility can put greater demands on budgeting and monthly cash flow.