Overview of Self Insurance
California has the largest workers' compensation self-insurance program in the nation. As of January 1, 2014, a total of 9,849 California employers were actively self-insured, not counting past self-insured employers that were still paying claims from their periods of self-insurance. These totals include:
- 268 individual private sector employers, 1,899 subsidiaries and affiliates of those employers covered under their programs.
- 22 private industry-specific group self insurers, with 4,213 members.
- 368 individual public sector employers.
- 81 JPAs (Joint Powers Authorities) - pools of self-insured employers - with 2,998 members.
In addition, 2,607 former self-insured employers were still paying claims from their periods of self-insurance. These include:
- 251 individual private sector self-insured employers and 4 private sector self-insured groups with 569 members.
- 77 individual public sector self-insured employers and 10 JPA’ s with 731 members.
These employers choose to self insure their workers' compensation liabilities to cover their employees for reasons of cost effectiveness, greater control over their claims programs, and increased safety and loss control management. Self insurance is an alternative to purchasing a workers’ compensation insurance policy.
The success of a workers' compensation self insurance program is often dependent upon the effectiveness of loss control activities and claims supervision. Most self insured employers contract with third-party administrators to perform some of these services, while some qualify to handle their claims own administration.
To receive self insured status, the employer must qualify through an application process, meet specified financial requirements, and be approved by the Director of the Department of Industrial Relations.
Requirements for Becoming Self Insured
The Application Process
Employers wanting to self insure their workers' compensation liabilities must apply to the Office of Self-Insurance Plans (OSIP) for approval.
The private sector application process for a new employer (not currently self-insured in California) takes about thirty (30) days from initial properly completed application to issuance of certificate of authority to self-insure. During that period, OSIP evaluates the application to determine the applicant's financial strength, proposed benefit delivery system, and suitability to participate in self-insurance.
Current regulatory financial requirements for an organization desiring entry into self insurance are:
- $5.0 million shareholders equity.
- Average net profits of $500,000 per year for the last five years.
- Certified, independently audited financial statements.
Each subsidiary or affiliate company of a private applicant must file a separate application to become self insured. They may apply with the parent company or individually, and the same application form is completed by the subsidiary/affiliate.
Group self insurance by non-affiliated companies is permitted under California regulation, for both private and public sector employers. During 2001, group self insurers began forming in the private sector for the first time. The first such application was approved effective January 1, 2002.
Current regulations permit existing private self insurers of net worth over $10 million to add new subsidiary or affiliate companies with an application for an interim certificate. This provides immediate self insurance for the new subsidiary/affiliate company and is valid for 180 days. During the 180-day period, a three-page application for a permanent certificate must be filed and approved prior to the expiration of the interim certificate.
Administering the Benefit Delivery System
Self insured employers are required to provide the same scope of benefits as an insurance company. Claims must be adjusted in California, and new self insurers are required to use a licensed third-party administrator for their first three years of self insurance. After that time, self administration may be permitted.
Everyone, both insurers and self insurers are subject to audits by the Division of Workers' Compensation to verify that benefits are promptly and properly paid to injured workers.
Self insurers are also subject to periodic audits by OSIP to verify the accuracy of claims reserving practices and the correctness of the reported workers' compensation liabilities. OSIP certifies individuals handling workers' compensation claims by means of an administrator's exam given throughout the year. A third-party claims administrator agency or company must also be licensed with OSIP to handle self insured claims.
Evaluation of Injury and Illness Prevention
OSIP requires an evaluation of the new applicant's injury and illness prevention program. A compliance inspection by a private, independent, registered professional safety engineer, certified industrial hygienist, or certified safety professional is part of the application process. At minimum, the applicant must be in compliance with Cal/OSHA safety and health regulations.
Filing Requirements as a Self Insurer
Once the application for self insurance has been approved, the self insurer is required to meet specified annual obligations.
California pioneered the Alternative Security Program (ASP) (Labor Code Section 3701.8) on July 1, 2003, as the first of its kind for any state Self-Insurance Security/Guarantee Fund in the United States.
The Self Insurers Security Fund with arrange and guarantee the collateral deposit requirements based on meeting credit standards for many self insurers. For those that do not meet the Fund’s credit standards, these self insurers are required to directly post their collateral security deposits with OSIP.
California Labor Code §3701(c) states “the deposit shall be an amount equal to the self-insurer's projected losses, net of specific excess insurance coverage, if any, and inclusive of incurred but not reported (IBNR) liabilities, allocated loss adjustment expense, and unallocated loss adjustment expense” …as determined by an actuarial study at the expected confidence level.
Information Bulletins: All Types of Securities
Annual Reporting Requirements
Self insurers are required to annually submit to OSIP and actuarial study, employer’s annual report and a copy of their audited financial statements.
The actuarial study determines the ultimate exposure of the self insurer’s workers’ compensation liabilities.
The audited financial statements are used to determine minimum financial eligibility to be self insured.
The annual report completed jointly with the claims administrator which describes:
- Claims paid in indemnity and medical.
- Future liability on open claims.
- Average number of employees and total wages for each adjusting location.
- A list of all open indemnity claims.
Private self insurers are responsible for paying the same fees that they would otherwise pay through a traditional insurance policy along with a couple of self insurance specific fees. A self insurer will normally receive two invoices annually, one from OSIP and one from the Security Fund. The OSIP invoice covers the statutory assessments all employer pay. These are:
- Workers’ Compensation Administration Revolving Fund (WCARF)
- Uninsured Employers Benefits Trust Fund (UEBTF)
- Subsequent Injuries Benefits Trust Fund (SIBTF)
- Occupational Safety and Health Fund (OSHF)
- Labor Enforcement and Compliance Fund (LECF)
- Workers’ Compensation Fraud Account (FRAUD)
- Annual License Fee and Per Capita charge per Employee (OSIP)
For more information on the Self Insurers Security Fund, Please visit their website at Security Fund.