If yes, sponsors bear greater financial liability

Among the many challenges facing HR departments, one of the most common and challenging is how to rein in the rising costs of employee benefits.

In 2009, once again, group benefit plan renewals have been characterized by double-digit health and dental inflation and utilization factors.

With health and dental benefits representing the lion’s share of group benefit costs – anywhere from 60 to 80 percent and group benefit plans costing up to eight percent of payroll, organizations are increasingly compelled to look for ways to reduce these mounting costs.

While most have opted to make changes in plan designs and introduce cost-sharing arrangements, others are exploring the option of changing their funding arrangement and are asking themselves, “Should we insure or self-insure?”

What does it mean to self-insure?

Self-insured benefits are also known as self-funded or ASO benefits – administrative services only. In this type of funding arrangement, an organization contracts with an insurance company or a third-party administrator to adjudicate and pay group benefit claims on its behalf – hence, administrative services only.

In an insured arrangement, the financial liability for benefit payments rests solely with the insurance company and the risk is fully borne by the insurance company. Both the financial liability and risk are completely transferred to the plan sponsor on an ASO basis.

Why self-insure?

Historically, organizations going the self-insured route have been motivated to do so by cost savings from the elimination of premium tax, which only applied to insured plans.

However, in Ontario, Quebec and Newfoundland, this cost advantage disappeared in the 1990s when those governments introduced premium taxes on group benefit plans regardless of funding basis.

Depending on the province or jurisdiction, savings from the elimination of premium tax range from two percent to 3.5 percent of the plan’s net premium (premium less any refund). Ontario does not permit the elimination of premium tax utilizing ASO funding.

Another source of savings is the elimination of risk charges since the organization now bears the risk. Depending on the type of benefit and the size of the plan, this option has the potential to save an organization anywhere from 0.5 percent to two percent of the plan’s premium.

Lastly, there’s the elimination of the insurance company’s requirement to hold reserves such as the Incurred But Not Reported (IBNR) reserves, and Claims Fluctuation Reserves (CFR), however many insurers on TPA’s (Third Party Administrators) require a float on deposit.

There is currently no legislation that requires organizations that are self-insuring to fund “reserves” and so the freed up funds can be used for whatever purpose the organization wants.