Though self-insurance has been around since the ’50s, for the most part it has been confined to large companies.
Now, self-insurance, using an administrative services only (ASO) contract, is a viable option for smaller enterprises, thanks to a blend of better technology, developments in financial and insurance products and the rise of third-party benefit administrators.
A benefit plan can be divided into two parts. The first part is an insurance component to cover a catastrophic event, such as long-term disability, the death of an employee or an unforeseen need for special medicines or treatments.
The second part is a cash contribution component (paid by the employer) used to pay for everyday benefits, such as drug costs or dental care.
Self-Insurance enables employers to purchase insurance protection where appropriate, and allows control over budgeted health and dental care expenses associated with low cost, high occurrence claims.
Thus, it is most often chosen where annual aggregate claims can be reliably estimatedand the employer has the financial resources to assume the risk if claims are higher than expected.
By choosing an ASO arrangement, the employer hopes to achieve economies of scale by outsourcing administration while retaining the financial benefits of good claims experience.