Understanding Assessments in a Self-Insured Group

If you’re a business owner or broker operating within California’s restaurant industry, you’ve probably contemplated the idea of participating in a SIG (Self-Insured Group) to enhance your control over workers’ compensation expenses. While assessments are infrequent but occasionally required, they tend to be a topic of conversation. In this blog post, we will explore three key questions:

1. What exactly is an assessment?
2. How are assessments avoided?
3. Why assessments should not be a deterrent to joining a SIG. 

Understanding Self-Insured Groups (SIGs)

Before delving into assessments, let’s look at the concept of self-insured workers’ compensation groups in California. In a SIG, businesses in a particular industry (eg. restaurants) come together to collectively manage their workers’ compensation coverage. The primary objective is to pool resources and reduce insurance costs while maintaining a high level of service and control over claims.

The Purpose of SIGs

SIGs operate under the principle of risk sharing. By joining a SIG, businesses aim to stabilize their insurance costs and minimize administrative expenses. Instead of relying on traditional insurance providers, members of the group contribute funds, which are then used to cover their workers’ compensation claims.

The Role of Assessments

Let’s demystify the often-misunderstood concept of assessments. In SIGs, assessments are infrequent but necessary. They come into play in the rare instance the group’s funds fall short of covering the total claims made by its members, resulting in a deficit. Deficits can occur due to various reasons, such as unexpectedly high claims costs or errors in the initial contribution rates. Assessments are not punitive; they are simply a way to collect the additional funds needed to cover a member’s claims for a specific accident year. In essence, an assessment means paying what should have been paid initially, ensuring the group can meet its financial obligations. 

The Assessment Process

On the rare occasion that an assessment is needed, here is how the process works:

1. Identifying a Deficit: The first step involves identifying that the group’s funds are insufficient to cover the claims adequately. This would happen during the regular financial review process.
2. Calculation of Assessment Amount: An actuary hired by the group calculates the required assessment amount based on the deficit and the number of members in the group.
3. Notification to Members: Members are informed about the assessment, including the amount, the reason for the shortfall, and the payment schedule.
4. Member Contributions: Members are then required to make additional financial contributions to cover the deficit. The assessment is typically divided into manageable installments, making it less burdensome for individual businesses.
5. Closing the Deficit: Once all members have made their contributions, the assessment funds are used to cover the shortfall in the group’s accounts.
6. Learning from the Experience: When an assessment is necessary, the SIG takes that opportunity to evaluate the cause of the deficit and adjust their financial planning or contribution rates to prevent future shortfalls.

Comparing Assessments to Commercial Insurance

Now, let’s draw a comparison between assessments in SIGs and what happens in traditional commercial insurance. If you were to opt for a traditional insurance carrier and, for example, had more losses than expected in a given year, your experience modification (or “mod”) would increase. As your mod increases, the traditional carrier will likely respond by raising your rates in subsequent years.

So, it’s crucial to understand that by choosing commercial insurance, you don’t escape the financial consequences of higher claims; you merely defer them, and you have zero control of your claims handling along the way. In contrast, SIGs address these issues collectively and transparently through assessments, spreading the risk among the group’s members.

Best Practices

There are a number of things SIGS do to proactively avoid deficits and maintain their financial stability:

1. Regular Financial Audits: Performing annual audits is a state requirement for SIGs in California. This practice helps identify potential deficits early, allowing for timely adjustments to contributions and financial planning.
2. Expert Administration: SIGS enlist the services of a first-class administrator, along with a skilled CPA and financial advisors. Their expertise ensures that the group’s financial planning and contributions are sound, reducing the risk of deficits.
3. Maintaining a Surplus: Building and maintaining a surplus within the group’s funds acts as a buffer. It provides a financial cushion that can be utilized to cover any shortfalls before resorting to assessments.
4. Checks and Balances: Having solid oversight, leadership, and checks and balances can prevent a deficit.  If only one group has control, deficits could be missed until it’s too late. Checks and balances help prevent this. 

By implementing these strategies, SIGs significantly reduce the likelihood of assessments, thus ensuring their continued financial stability.

Conclusion

Assessments in SIGS are indeed rare.  However, when they are necessary, they are not punitive measures but rather a mechanism to collect contribution that either should have been collected in the first place or additional contribution needed for unexpected losses. 

What may come as a surprise is that the benefits of being in a SIG are so substantial that even in the event of an assessment, most SIG members report overall savings year over year as compared to switching to the traditional market.  Moreover, the risk of an assessment is minimized by ensuring the SIG has strong leadership, redundant checks and balances, and exceptional financial oversight.

The advantages of insuring through a SIG are crystal clear.  It allows members to control their money and their future which ultimately leads to higher profits.  This explains why some of the largest and most successful businesses prefer self-insurance over traditional carriers, which primarily serve their shareholders’ interests. Given the rarity and controllable nature of assessments, it simply doesn’t make sense to forgo all the other benefits that SIGs have to offer in fear of this minimal risk.  It’s a decision that could result in missed opportunities for cost savings, risk control, and financial stability that self-insuring can offer, without the deferred consequences of commercial insurance rate hikes.