Your group insurance broker promises you the moon with “self-insurance” but is incapable of explaining why or even what it is about? AGA can help you sort things out and demystify this type of agreement.
Let’s start by defining self-insurance. It is a type of financial arrangement where claims are not insured and the financial risk is borne by the policyholder (usually the employer) instead of the insurer. The actual claims are charged, along with administration fees and related taxes. In other words, you pay exactly what it costs!
This type of arrangement is mainly found in health and/or dental care coverage, where claims are frequent and more predictable than with life and long-term disability insurance.
The risk remains nevertheless under control. Purchasing a “stop loss” insurance will limit the risk for self-insured employers, as prescription drug claims exceeding the selected threshold and travel insurance claims, that can be very costly, will remain insured and will not be charged directly to the policyholder.
- Self-insured does not mean paying for everything! All expenses are governed by a policy, the same as with an insured benefit.
- Theoretical rates can be used to pay monthly premiums and calculate employee contributions.
- The administration fees are levied on claims instead of premiums.
- Insurance tax, capital tax and/or compensation tax, specific to each province, must still be paid and are also calculated on claims instead of premiums. In addition, there are sales taxes such as HST, GST or QST for Quebec, which are charged on the administrative fees and on the compensation tax.
- Regular accounts must be kept to compare theoretical premiums against claims, fees and taxes. Surpluses can be returned to the policyholder, but any deficit must be reimbursed.
- It is important to note that in Quebec, in order to comply with government guidelines, the taxable benefits must be calculated on the average amount of actual claims per status (single, family, etc.) rather than on theoretical premiums.
Points to be Considered Before Going Ahead
Group size is a factor that will have a bearing on the choice of a financial arrangement. Very small groups (less than 50 employees) should weigh the pros and cons before entering into a self-insured agreement. For such groups, claims could turn out to be too unstable for self-insurance to be contemplated.
When the premiums paid are much lower than the reimbursed claims, it will be difficult to switch from an insured agreement to a self-insured one, as this would entail temporarily higher costs. The financial profile of the benefit must be analyzed in order to make an informed decision.
Sources of Savings
Provided it is properly set out, this type of arrangement can generate savings for an employer:
- Since claims are not insured, the risk charges are eliminated.
- The claims paid reflect the actual group experience, which is often more favorable than the claims anticipated by the insurer, based on “frothy” inflation assumptions!
- Reserves will be recognized as the unknown claims will be paid, rather than being funded by the premiums.
- Employers who charge HST, GST, QST or other taxes can recover the tax they pay under the self-insured agreement.
It is inaccurate to say that a self-insured agreement eliminates inflation and reserves, but it does ensure that no margin of safety will be included in the premiums.
Doing business with AGA Benefit Solutions may also provide additional savings, because our stop loss rates are usually competitive and negotiated with a specialized insurer.
Facts, Advantages and Disadvantages
Self-insurance leads to more stable costs. There is no tendering discount (no insurer, no tendering!) and no investment to be subsequently recovered by the insurer, contrary to the yo-yo effect often experienced with a traditional insured agreement. The cost of self-insured benefits reflects the fair value of coverage, year after year.
However, this means that when transitioning from an insured agreement to a self-insured one, the cost of self-insurance will sometimes be higher than the cost of the insured agreement for the first year, but it should decrease afterwards and become less expensive.
Thus, the advantages of a self-insured agreement include cost stabilization and potential long-term savings. Eliminating the insurer also does away with the negotiation talks upon plan renewals.
On the minus side, the calculation of taxable benefits (in Quebec only) can lead to wide variations for very small groups. When deficits occur, it will be difficult to recover these amounts from employees.
Your AGA Advisor will be happy to discuss the pros and cons of a self-insured agreement with you and estimate your potential savings.
Louise started her career at Blue Cross before working as a Senior Advisor for a large actuarial firm for more than 15 years. Fellow of the Canadian Institute of Actuaries, Louise joined AGA in June 2014. She assumes responsibility for training, provides technical support, and supplies advisory activities for the large business clientele. Louise is also lecturer at l’UQAM.
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