Self Insurance

Mar 05, 2012

Most employer benefit programs are fully insured.  In basic terms, that means in the long run premiums must cover the costs of claims. The insurance company bears all the risk in the short term if the policy holder terminates their coverage before the claims costs are covered.

What if an employer wanted to take on that risk themselves and use the carrier solely to only adjudicate and pay claims? This is known as self insurance or Administrative Services Only (ASO). The employer assumes all of the risk or liability and the carrier administers the plan and pays claims. ASO plans are normally recommended for large groups where the claim level is predictable and stable. The benefits mainly considered for ASO are Extended Health Care, Dental Care and Short Term Disability.

Let’s look at some of the advantages of moving to an ASO model. First, the carrier’s expense charge for risk within a premium structure is eliminated  Next, reserves essentially become the property of the company and not the carrier and they often take the form of a ‘float’ under an ASO contract. Also, because there is no insured “risk,” the carrier may potentially allow for more flexibility in plan design. For example, eligibility requirements may become less stringent for retirees. Finally, trend or inflationary factors become what they truly are and not an insurance carrier’s interpretation of what they should be.

The disadvantage of an ASO model is mainly a cash flow risk.  Because claims can vary substantially from month to month, the company must be that able to cover these cost fluctuations.

Make sure you seek advice from your consultant first to make sure that this is right for you.

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