What Does It Take to Meet Self-Insurance Requirements?

As an employer, self-insuring a workers’ compensation program can offer both financial and operational advantages. However, self-insurance is not a one-size-fits-all solution. It is a privilege granted by state regulators based on an evaluation of financial strength, claims management capabilities, and risk mitigation strategies.

“For employers with strong safety cultures, stable finances, and a commitment to employee well-being, self-insurance can be an incredible option,” said Michael Jokerst, Client Engagement Manager at Safety National. “However, state requirements are becoming increasingly strict, especially in states with monopolistic workers’ compensation systems, like Washington and Ohio. While an employer can bypass their state fund, both of these states tend to require more to retain self-insured status.”

Here, we break down the criteria, application process, and compliance responsibilities associated with a self-insured status.

Criteria

Essential criteria for self-insured status will vary by jurisdiction and whether it is an individual employer or group trust applying, but typically, most states will require proof of the following:

1. Financial Stability: This may include a minimum net worth, minimum total assets, positive net outcome, and audited financial statements. The financial threshold will be high for an individual employer, whereas a group trust’s financial minimums will be more moderate since they are distributed across its members. Many states also require collateral to secure future obligations, such as surety bonds, letters of credit (LOC), and cash or securities deposits.
2. Employee Count and Operating History: Many states require a minimum number of employees, often 100 or more. To protect these employees, a written accident protection program and a favorable loss history may also be requested.
3. Financial Sufficiency: In addition to net worth requirements, organizations may be asked to meet a minimum credit rating with Moody’s and Standard and Poor’s (S&P). However, this is not universally required.

Group self-insurance will typically also need to be licensed and approved by the state, maintain a joint and several liability agreement, provide a security deposit or surplus fund, and use a third-party administrator for claims administration.

Application Process

Applying for self-insured status can be lengthy, depending on state requirements. Many states’ processes include:

• Detailed application form
• Proof of financials, safety programs, and claim handling procedures
• Actuarial reports estimating expected liabilities
• Application fees

For example, currently a self-insured applicant in Washington will submit a $250 application fee and complete a nine-page questionnaire and enrollment form. They will also provide three years of audited financial statements, a copy of their written accident prevention program, and a list of all subsidiaries or divisions, including locations, contacts, and the number of employees.

Maintaining Self-Insured Status

The most divisive aspect of self-insurance by state is how a self-insured can retain its ongoing status. Some states heavily scrutinize self-insureds, whether through direct oversight of an individual employer or ongoing regulation and group-level requirements for a group trust, such as oversight through a board of trustees. However, this is necessary to prove that the employer or group trust can continue to cover current and future workers’ compensation costs. This may include:

1. Ongoing Regulatory Reporting: This helps a state’s workers’ compensation agency monitor performance and compliance. Reporting may include renewal applications, claims reports, reserve certifications, or payroll and exposure data.
2. Proper Claims Management: Appropriate claims record maintenance in addition to timely benefits and medical cost payments are key components of maintaining good standing as a self-insured. For group trusts, a licensed third-party administrator can help manage the administrative burden and meet compliance standards.
3. Proactive Risk Programs: Safety policies play a significant role in applying for and maintaining self-insured status because states may require safety inspections, employee training, and OSHA reporting.
4. Timely Audits and Reviews: Routine audits may occur annually to evaluate claims handling practices, financial conditions, and overall compliance.

Each state will handle self-insurance differently, with some requiring higher net worths, larger minimum annual claims payments, specific forms, and assessment fees. Assessment fees might include funds related to administrative costs, safety and hygiene, an uninsured employer, or a second injury. However, nearly every state has a regulatory system that provides oversight of self-insurance, so employers will be required to maintain strict compliance in order to best protect injured workers.