What is a Self-insured Group (SIG) for Workers Compensation Insurance and Should I Participate in One?

The idea of using self-insured groups to satisfy an employer’s workers compensation insurance obligation has been around for many years. As you know, most states require every employer to carry Worker’s Compensation insurance as a statutory obligation. Because of inefficiencies in the system, as well as competing interests such as insurance companies, doctors and lawyers, workers compensation insurance can be extraordinarily expensive. As well, some employers are dissatisfied with how claim adjustments are handled and how slow the system moves. These factors have made self-insured groups attractive in certain circumstances.

Here is what is most important to understand about self-insured groups (SIGs). First, a self-insured group is often made up of employers within the same industry or those which perform the same trade or activity. The reason for this is the SIG sponsor’s ability to better predict losses from such a homogeneous group. Second, you need to know that joining a SIG comes with risk. The risk comes from the concept of “joint and several liability.” What is that you say? Good question. A self-insured group is just the sum of its parts. In other words, the group has to be able to pay all the claims and expenses which accrue from all of its members. That is where the California labor code section 3700-3705 comes into play. The state California requires any SIG to impose upon all its members the obligation to discharge all liabilities of their own and all liabilities of all other members of the group. “You mean I have to pony up money to pay claims for the other members as well, even if they walk away and don’t pay their bill?” Yes, that would be correct. I read a white paper recently which gave a great example of how this works. You are invited to join four of your friends for dinner at a local restaurant. All five of you order whatever you want to eat and to drink and you had a great time. The law makes you all jointly responsible to pay the bill. The law also makes you severally liable to pay this bill. If everyone stays at the table (joint) and has enough money to pay the bill, everything is okay. However, if four of your friends skip out on you, the remaining one (several) has to pay their share the bill… That’s the law. That is also joint and several liability.

Here is what is most important to understand about self-insured groups (SIGs). First, a self-insured group is often made up of employers within the same industry or those which perform the same trade or activity. The reason for this is the SIG sponsor’s ability to better predict losses from such a homogeneous group. Second, you need to know that joining a SIG comes with risk. The risk comes from the concept of “joint and several liability.” What is that you say? Good question. A self-insured group is just the sum of its parts. In other words, the group has to be able to pay all the claims and expenses which accrue from all of its members. That is where the California labor code section 3700-3705 comes into play. The state California requires any SIG to impose upon all its members the obligation to discharge all liabilities of their own and all liabilities of all other members of the group. “You mean I have to pony up money to pay claims for the other members as well, even if they walk away and don’t pay their bill?” Yes, that would be correct. I read a white paper recently which gave a great example of how this works. You are invited to join four of your friends for dinner at a local restaurant. All five of you order whatever you want to eat and to drink and you had a great time. The law makes you all jointly responsible to pay the bill. The law also makes you severally liable to pay this bill. If everyone stays at the table (joint) and has enough money to pay the bill, everything is okay. However, if four of your friends skip out on you, the remaining one (several) has to pay their share the bill… That’s the law. That is also joint and several liability.

However, this analogy does breakdown in that, unlike a restaurant bill, workers compensation liability does not end when you “pay the bill and leave the restaurant”, so to speak. In what we in the industry call “ultimate loss development” Worker’s Compensation liability can continue and increase over 5 to 10 years. So, what happens if I have five members of a SIG in the first year, one leaves the second year and liabilities develop (increase) resulting from the first year? The member of the SIG which departed still is obligated to pay liability back to the first year. If the departed member fails to pay, the remaining four members must make up the departed member’s share. This liability risk is something that continues to reside on an employer’s balance sheet for multiple years, whether they remain in the SIG or choose to depart the SIG. This is in stark contrast to what we call “guaranteed cost” Worker’s Compensation insurance. Under the guaranteed cost scenario, an employer pays an insurance company and agreed- upon premium for a specific year and when that year is over the employer faces no future liability for “ultimate loss development” from past claims. That risk stays on the insurance company’s balance sheet. Does this mean you should never participate in a SIG? Not really, but it does mean it is risky and you have to be willing to bear the joint and several risk of others in the group, which can remain a balance sheet entry for [reasonably] 3 to 5 years. If you are not a risk taker in this regard, I would recommend sticking with the guaranteed cost solution. One more factor to consider. If you’re an employer in any industry which suffers high frequency of claims, I would recommend against participating in a self-insured group. High claim frequency employers are industries such as property managers, construction trades and manufacturing. The reason for this advice is that those employers with the risk of high claims frequency, when combined with employers which also have high frequency, will increase the probability that the SIG will suffer losses in excess of what is projected by the SIG sponsor. This is why an insurance company will combine multiple industries in their loss pools, as this allows the low frequency employers to offset claims from high frequency employers. Most SIGs do not offer such diversification.

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