Self-insurance--could it work for you? Rethinking the delivery of employee benefits.

With escalating healthcare costs, smart employers are contemplating a novel funding method--self-insurance--to finance employee benefit plans.

Though self-insurance has been around since the '50s, for most of this time its use has been confined to large companies, like banks and railways.

A benefit plan can be divided into two parts. The first part is an insurance component to cover a catastrophic event, such as long-term disability, the death of an employee or an unforeseen need for special medicines or treatments. The second part is a cash contribution component used to pay for everyday benefits, such as drug costs or dental care.

In a self-insurance arrangement employers only pay for the benefits they use. This provides them with more flexibility, cuts down on administration costs and gives firms greater control over the amount they actually spend on benefits.

Traditionally, most firms have simply purchased a benefit plan through an insurance company. That was fine when benefit plans were first introduced and multiple insurers were competing to provide employers with different options.

However, a number of events are conspiring to force employers to think about benefits differently. First, consolidation and demutualization of the insurance industry, means fewer competitors and therefore fewer options when it comes selecting a plan.

Second, rates are rising quickly. While the cost of inflation has been running between two to three per cent, insurers have been hiking the cost of their benefit plans higher. Health care inflation trend factors used by insurance companies are averaging increases between 18-22% annually.

Traditional Models

In the group insurance industry, insurers spread the risk associated with loss of life, long-term disability and other catastrophic claims over their entire client base, so employers pay similar rates within their industry regardless of their claims record. There's no way for insurers to accurately predict what these low-frequency, high-expense claims will be for each employer, so the risk is spread across many employers based on actuarial assumptions. This is the purpose of pure insurance--to cover high-cost, unpredictable losses.