Pooling risks and rewards in workers' comp insurance
By Jennie L. Phipps • Bankrate.com

A growing number of small companies are cutting workers' compensation costs by joining self-insured groups, commonly known as SIGs.

Michael D. Morris, an attorney who is administrator and CEO of the Louisiana Homebuilders Association Self Insurers Fund, says his 2,300 members -- plumbers, electricians, heating and air-conditioning specialists and other trades people -- turn to his SIG not just for cheaper rates, but also for expert advice.

"With us, you'll find more service and more loss control. Although we work with risky classes, we enjoy loss ratios substantially below what private carriers have," Morris says. "We're able to do it because we understand our clients, and we're involved with them. They listen and they take the help that is provided and work with it, so the result is lower claims and lower costs for everybody."

While the concept differs slightly from state to state, SIGs work similarly in the nearly 40 states in which they are legal. A group of employers form a nonprofit corporation or trust and hire a professional to manage it. This new entity then purchases the insurance, meaning the SIG members essentially "own" their own workers' comp company.

The best part: The group pools the money it otherwise would pay an insurer, earning investment income on funds held in reserve. If a SIG program cuts down on workplace injuries and claim costs, the surplus, or "dividend," from premiums is returned to members.

Of course, if a company or the group as a whole has catastrophic losses, members pay the difference, up to a limit. Above that point, the group buys excess insurance to offset a single large loss or a combination of losses.

This potential risk is sometimes considered a downside to SIGs, but in general, they have better loss ratios than insurers. The average commercial workers' comp company must pay out in excess of 70 percent of the premium it collects, while SIGs often enjoy loss ratios as low as 20 percent. This overage is returned to the SIG members. In case of the Louisiana Homebuilders, Morris says more than $24 million has been paid out in dividends in the last six years.

Since members with the best claims records get better dividends, and bad risks have a group-wide price, it pays everyone to monitor safety issues closely. Those few members who fail are first counseled and, ultimately, drummed out of the SIG.

If you're interested in joining a SIG, check with your professional organization. It should be able to point you in the right direction. Or ask your property-casualty insurance agent. He may have additional advice on other ways to cut your workers' comp costs.

And before you sign up with a SIG, ask the same questions of the organization that you'd ask of any workers' comp provider.

Jennie L. Phipps is a contributing editor based in Michigan.

-- Posted: Oct. 30, 2002