If you’ve been looking for ways to reduce the costs of insurance, you may have come across “self-funded” insurance options. But what are they, and how do they differ from the traditional insurance model? Are self-funded benefits for employers the future? Explore a more proactive approach to managing the costs of employee benefits.
What is a self-funded model?
In a self-funded model, employers assume the financial risk associated with offering health benefits. Rather than paying a set premium to an insurance carrier, self-funded models pay claims, often from a special trust, as they occur.
Where do the premiums go?
Rather than a fixed monthly premium paid to an insurance carrier, here’s how insurance costs are covered in a self-funded model.
The claims bank is a dedicated pool specific to each employer. The Insurance carrier doesn't pay out claims, and instead the employer pays out from this bank. Each month, the claims bank runs at a deficit or surplus depending on the cost of claims paid out. Money ebbs and flows to and from the claims bank.
Administrative Fees: These fees go to a third party administrator who moves around the money. They are the “boots on the ground” in this situation, collecting premiums and paying them to the carrier.
Commissions: A small percentage or dollar amount that is set aside to pay the insurance broker of a plan for their services.
Stop Loss Insurance: A measure of protection in a self-funded arrangement, stop loss insurance ensures that the employer isn't footing the bill for large claims.
Fully Insured vs Self Funded
What’s the difference in cost? Most employers who aren’t self-funding their employee benefits are losing money.
Here are a few reasons why:
Lost Premiums: With fully insured benefits large claims are sporadic, there may be long stretches where the insurance company is making a lot of money off your business in a fully-insured arrangement
Large Increases in Premiums: In a fully insured model, premiums go up after a large claim year. This can be as much as a 40% increase.
Never See Decrease in Premiums: With fully insured, that 40% increase will never come down.
Impossible to Control Premiums: In a fully insured model, you don't have any control and are at the mercy of those premium increases.
Costs are Fixed: Large companies typically think of insurance as a fixed cost they have no control over.
How does self-funding solve these problems?
With a self-funded arrangement there are better premiums, more control, and more flexibility.
Premiums can Return: In a self-funded arrangement, your business can actually get some of those premiums back.
Premium Increases are Smaller: With self-funded, only the stop loss insurer loses money from large claims. The stop loss premium will go up, but because it only makes up ~ 10% of the total cost, that increase is much smaller.
Premiums can Decrease: With stop-loss insurance in a self-funded model, you can bring that premium back to where it was if you don't continue to file a large amount of claims.
Premiums can be Controlled: With a self-funded approach, you have more control and can be more creative with the way you handle insurance costs.
Costs can be Strategized: With self-funding, you can actually leverage true risk management strategies.
Employers using self funded benefits will find insurance to be a partner to your business. Be proactive for what’s best for the employer, the employees, and the company.