A decision to leave the security of insurance for the world of self-insurance is a major decision. Opting to self-administer takes self-insurance to another level and requires both a leap of faith and a great deal of analysis.1
The State of California clearly believes self-administration is a decision that should not be made lightly as they will not entertain the notion until an employer has been self-insured for at least 3 years.
Many excess insurers are wary of providing coverage when claims are self-administered. Some will outright insist on the use of a professional third-party administrator (TPA) as an assurance that the claims will be properly handled. If insurers whose coverage attaches at an elevated dollar level are worried about self-administration, that's a pretty good indication that the self-insured should move cautiously and be certain that their decision will result in claims handling that is better than what any TPA could provide. An expectation of unparalleled claims handling is critical to the self-administration decision since the self-insured employer will pay for the large losses within their retention on top of their large investment in a claims department.
This article will explore the decision-making process along with the risks, possible rewards, and challenges of administering your own claims.
Costs and Concerns
Overhead is a core issue that must be fully addressed when considering self-administration. Overhead analysis includes a look at startup costs, but it is more than just a one time startup calculation that needs to be considered. The startup costs would include hiring costs, salaries, benefits, office space, office furnishings, computers, reference materials, and a Claims Management Information System. The initial cost of these items can be calculated and certain of the items can be depreciated and spread over a number of years. However, some of the items are nowhere near static and will fluctuate greatly over time. While furniture and computers have a set cost and will hopefully last 5-10 years without replacement, personnel costs are very dynamic. Benefits such as health insurance have been increasing at double-digit annual percentage rates. Beyond this, if the plan is to attract and keep good people, there will have to be annual salary increases, possibly bonuses, and provisions for continuing education and seminars. Given the changeable nature of the investment, a 5-10 year pro forma should be evaluated.
The personnel issue is particularly tricky for self-administered claims operations. The whole point of self-administration is to put together a claims operation that provides better handling than what can be purchased from a TPA. To assemble an excellent team, it will likely be necessary to pay a premium to attract the best adjusters. Beyond a competitive salary, the best adjusters are often looking for opportunities for advancement. Most self-administered claims departments are relatively small with very few layers of management and therefore have limited opportunities for promotions. This leaves salary, bonuses, and benefits as the only carrots available to retain good employees. The result of these carrots over time is a cost structure that just keeps growing and growing. In a relatively short period of time, the actual overhead investment will look nothing like the initial calculation.
While self-administration costs typically grow over time, TPA fees tend to remain fairly static due to extreme price competition. The premium being paid for the self-administered claim handling edge is ever increasing. The price competition among insurers and TPAs can lead to cost controls in their claims departments that can have a big impact on quality. One cost control involves the issue of turnover. Claims operations profess to take great pains to limit their turnover because they know it is a sore point with their customers. The truth is that claims departments can only charge so much for their services due to competition, and therefore they keep their costs in check by replacing experienced (expensive) employees with less expensive and less experienced adjusters. While they may not want to lose their best, most productive employees; turnover is a means of keeping expenses under control.
Another cost control area is related to adjuster caseloads. Claims operations will assert that their adjusters handle a limited caseload to ensure that they have the time to do quality work. In reality, the adjusters at a TPA often handle some multiple of the number claimed in order to keep the staffing level (expenses) to a minimum. Typical adjusters harbor no illusion about keeping their heads above water; they work to see how close they can come to the surface. The result of all this is that there is a real opportunity to assemble a better claims team than can be purchased from a TPA, but this team will likely cost substantially more—particularly over time.
Beyond the direct personnel costs, there are indirect costs and other challenges presented by employing your own claims department. An investment of time is required to search for, interview, and hire employees. If an outside vendor is used to identify qualified candidates, then this indirect cost also becomes a direct cost. Of course, there is no guarantee that the hiring decisions will always be perfect. This can cause problems that are not seen with a TPA. If a TPA assigns an adjuster who is not a good fit, the problem is remedied by a simple request to replace the assigned adjuster. If a bad hire is made internally, it can lead to morale problems in the department and messy situations where the employee must be fired.
Another challenge is presented by self-administering claims in multiple jurisdictions. If the claims will be handled out of one state, but the company has operations in multiple states, it becomes very difficult to hire and keep adjusters that have experience in the other states. It is rare to find adjusters who have multiple jurisdiction experience. This makes it difficult to hire adjusters to handle the states outside of where the department is located. While this is less of a concern with general liability or auto liability, since civil judicial systems are quite similar across the country, it is a major concern with workers compensation where the laws and formwork vary greatly from state to state. For multistate self-administration to work, it may be necessary to offer relocation packages to experienced adjusters or the company may be forced to hire employees who need substantial on-the-job training. Suffice to say that the personnel issues associated with self-administration are many.
Having explored some of the costs and challenges of self-administering claims, we can move on to potential positives. A major reason to assume the handling of your own claims is to gain full control. I can use my own situation as a claims consultant to illustrate the issue of control. One of the great frustrations with my role as a consultant is that I review and advise on a large number of claims, but I must then rely on others to carry out the recommended plan. The frustration comes when the plan isn't carried out, isn't executed in a timely manner, or is changed without good reason.
Overseeing the work of a TPA who doesn't execute satisfactorily can be similarly frustrating, but the frustration is compounded by the fact that the TPA's poor performance costs your company money in inflated claims. I may get frustrated professionally, but your frustration takes money out of your pocket. Self-administration puts the claim handling function in the hands of someone who truly has a vested interest in achieving successful claim outcomes. This can pay dividends in the form of reduced claim costs.
Self-administration also allows a company to extend its corporate culture to its claims operation so that the two are in sync. Oftentimes there is a disconnect between the culture of a TPA and its client. Every TPA will promise to handle claims in the manner desired by the client, but the reality is that the TPA's own handling bias often shines through. Self-administration allows an employer to take a very soft approach with its employees and to extend this approach to its injured employees. It would also allow another employer that has strict, unbending employment guidelines to administer its claims in that manner as well. Either approach can result in the effective management of claims, but it may take self-administration for the chosen strategy to be consistently employed.
If a team can be assembled that possesses expertise and drive that exceeds what is provided by a TPA, there is a chance for successful self-administration. Most would define success as a reduction in the total cost of risk through superior claims handling. Assembling and maintaining a team that can deliver this type of result is a challenge and for a multistate exposure (particularly for workers compensation) it is an enormous challenge. The decision to self-administer is seldom made in order to save on the cost of handling claims. The expense of self-administration will most certainly exceed the cost of hiring a TPA. Also, the decision to self-administer is not easily reversed so this is no casual decision. Opting for self-administration requires careful analysis and yes, a leap of faith. It's clearly not the answer for everybody, but for some, it may represent an opportunity to achieve a significant decrease in the total cost of risk.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.