Comp Reform Reduces Interest in Self Insurance

Under state law, there are two ways for employers to comply with the requirement that they carry workers' compensation coverage for their employees: by purchasing insurance coverage from a private insurance carrier or the State Compensation Insurance Fund, or by qualifying to self insure.

Employers who qualify to self insure receive an approval certificate from DIR's Office of Self Insurance Plans (SIP). To qualify to self insure, an employer must have at least $500,000 in annual payroll and provide a bond worth at least the employer's past three years of workers' compensation losses.

Traditionally, only larger employers have qualified to self insure. Self insurance has been seen as the more cost effective means of covering workers' compensation liabilities, since self-insured employers do not have to pay costs associated with insurance premiums-such as a carrier's administrative overhead and profit.

Following enactment of workers' compensation reform legislation, the minimum rate for insurance coverage dropped nearly 32 percent. Since the minimum rate law repeal, effective at the beginning of 1995, rates have decreased further.

Carriers now are free to set rates competitively, causing increased competition and price-cutting for business. In many cases, employers have found insurance coverage cheaper than the costs of self insurance.

One consequence of the legislative reforms in recent years and the resulting decrease in workers' compensation rates has been a decline in the number of employers choosing to self insure. Before, self-insured employers had enjoyed virtually uninterrupted growth, rarely choosing to return to purchasing workers' compensation coverage.

For instance, 1,476 private sector employers representing roughly 2.4 million employees were self-insured at the end of 1992. Another 2,195 public sector employers covering 1.6 million employees were self-insured. At the end of 1993, the self-insured totals were 1,533 private employers and 2,422 public employers. As of October 1995, the number of private sector participants had declined to 1,505. In the public sector, 2,046 employers were self-insured.

The decline among public agencies is particularly noteworthy. Most public agencies in California have been self-insured, since these agencies usually have enough employees and adequate financial security to easily qualify for self insurance. The nature of their business also is more stable than that of private sector industries.

However, public agencies-like private employers-seem to be responding to the appeal of lower insurance premiums and opting to purchase insurance.

During 1995, 10 joint powers authorities representing 302 public agencies withdrew from self insurance. State law allows public agencies to band together under joint powers agreements for purposes of self insurance. Most of the withdrawing joint powers authorities represented school districts.

Five "stand alone" public agencies also withdrew: the County of Ventura, Monterey Peninsula Unified School District, San Diego Community College District, North Monterey County Unified School District, and the Conejo Recreation and Park District.

These five agencies and the 10 joint powers authorities accounted for over 150,000 employees.

In the private sector, five employers insuring over 25,000 employees withdrew from self insurance. They were the California Almond Growers Exchange, First Interstate Bancorp, Granite Construction, The Bell Gardens Bicycle Club, and Harris Farms, Inc.

The decrease in insurance premiums resulting from reform has hindered a legislative reform in self insurance.

In order to increase coverage options and reduce costs for small employers, the 1993 legislation allowed small employers in the same industry to band together and qualify for self insurance. SIP adopted implementing regulations. However, no group of small employers has chosen to participate because insurance coverage has become so much more affordable in the marketplace.