Whenever you pay out money and then get some of it back, it’s a good thing right? So how do we do it?
For mid-sized companies “self-insurance” has become kind of an ugly word. If claims are low you save; if they are high, you are likely to pay more than you would on a “regular” policy. Ouch! If you are “participating” in the risk, you stand to pay less overall in the good years. So let’s break it down.
When you pay a dollar in premium, it is broken down into segments that are used for different things:
- The Carriers Fixed Cost of Doing Business – Taxes, overhead and commission amount to roughly 15% to 20% of the total cost.
- Aggregate Claims – All the claims incurred and paid in a certain time frame, usually a year, amount to 75% to 80% of the total cost.
- Specific Large Claims – The carriers pool off large claims, typically for the amount above $25,000 in a given year; they are paid by money in a “pool” and therefore are removed from the “total cost”.
- Margin for Claim Fluctuation – An additional 20% to 25% on TOP of the other pieces is used to pay claims incurred in a year, but paid after that year is over.
Notice that all these pieces taken together add up to more than 100%. This is because 100% is the “Expected” sum of the Aggregate Claims + Fixed Cost Levels. Margin is extra.
The Expected level would be like the “regular” policy…no “ouch” since it’s a set known number. The total exposure of the Self Insured policy is greater.
In Refund Accounting plans you actually pay ALL the segments of a Self-Insured policy added together. At the end of the year, if you overpaid, the excess is refunded to you. That additional Margin can be reduced or eliminated after a company goes through some more aggressive underwriting so that the total exposure is less than many other policies with the same benefits.
Give us a call to learn how you can get the most out of your insurance plan.