When Michael Turpin was a top insurance executive, he understood that the more comprehensive coverage his company sold customers, the more profit his business would make.

Self-insurance is common among large companies and rare among small ones. Midsized businesses are the ones that should reconsider their options, he says.

“Insurance can cost close to $10,000 per employee per year,” Turpin says, “so 100 employees cost as much as $1 million a year. Self-insurance can save 12 percent, or $120,000, which can be better used to hire more employees or grow the business.”

Risk vs. reward

Self-insurance, at its heart, is a matter of risk vs. reward.

“There are two ways to finance insurance and health care,” he says. “One is to transfer risk to a third party in the form of insurance, and the other is to retain risk by self-insuring. The question is how much of the risk you want to retain and how much you want to transfer.”

The Employee Retirement Income Security Act of 1974 permits companies to save money by bypassing state legislation and design benefit plans tailored for their staff, according to Self-Insured Plans LLC. This is achieved by setting up trusts that are managed by companies known as Third Party Administrators. They administer the trusts, arrange cost agreements with health care providers and pay claims.

Self-insured businesses purchase catastrophic policies in case any individual claim exceeds an acceptable amount. There also is an aggregate amount in an event where total clams exceed the agreed-upon amount.

Only about 26 percent of employers with between 100 and 499 employees self-insure, compared with more than 82 percent of employers with 500 or more employees, according to data from the U.S. Department of Health and Human Services. The risk level is simply too great for most small businesses.

“If an employer has fewer than 50 employees, less than 5 percent self-insure,” Turpin says. “Workforces from 50 to 100 still are not big enough that you can predict the risk. One major claim can cause problems. It's like trying to self-insure your car, where you can be accident-free for four years and then crash your car in the fifth year.”

As the size of a business grows, the rewards begin to outweigh the risks. “At around 300 employees, I would suggest that fortune favors the bold,” he says.

Hidden benefits

The most obvious benefits — saving up to 12 percent on insurance costs — are obvious. A closer look reveals other advantages. Turpin has no agenda against insurance brokers, but his background taught him that some costs can be obscured.

“There is much more transparency in self-insurance,” he says. “For example, I have to wonder why if I am paying $3 million for insurance, $150,000 goes to my broker.”

Self-insurance peels back the hard numbers.

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