Street smart from an insurance crisis that has sent premiums skyward in the past decade, many Utah corporations are turning to creative self-insurance plans to save up to 30 percent in insurance bills.Corporations and municipalities are banding together to form insurance pools or are examining potential savings figures and developing their own self-insurance programs in the face of high premiums.
However, commercial insurers such as Blue Cross and Blue Shield of Utah and Grant Hatch and Associates in Salt Lake City caution companies on self-insuring, warning some self-insured funds can't adequately cover catastrophic damages.
Still, the move toward self-insuring continues, illustrating a trend in Utah and across the nation toward non-traditional insurance that is saving corporations hundreds of thousands of dollars yearly.
Utah memberships in self-insurance trade groups are growing significantly, and municipalities across the state are flocking to join insurance pools, according to state municipal risk groups.
Between 10,000 and 20,000 local governmental entities across the country are now self-insured, two-thirds doing so since 1985, according to the National Insurance Consumer Organization.
In 1984, 20 percent of U.S. insurance dollars went to "non-traditional" plans and now an estimated 35 percent do, the organization said.
During the insurance crisis in 1985, self-insuring became an alternative for not only money-conscious companies looking to save a buck, but also for companies that simply could not find insurance in the commercial market.
"It wasn't just economic. During the insurance crisis some corporations were unable to purchase insurance," said Jane Erickson, president of the Risk Insurance Management Society in Salt Lake City and risk manager for Salt Lake City Corporation. Finding coverage for high-risk areas like liability became virtually impossible for some companies, she said.
But for most companies, it is the bottom line that forces them to consider self-insuring, says Doug Green, an insurance analyst for the Utah State Insurance Department.
"It's simply the fact that companies can control costs better if they're self-insured. In an insurance program, if an insurance company starts losing money across the board, they will raise the premiums on all contracts. You're paying for premiums that aren't yours," he said.
However, some commercial insurers send up a warning signal, advising self-insurers to be aware of the risks they must assume.
Companies can "risk everything they have" by self-insuring with funds that may not handle catastrophic damages, said Dick Taylor, president of Grant Hatch and Associates, an independent insurer.
"The industry to a large degree forced people to go into self-insurance with the market as it's been in the last couple of years," Taylor said. But some companies that became self-insured were companies that were high risks in the first place and difficult to insure. For them, self-insuring may protect them from basic damages but may not suffice if larger claims are made.
"They could be in very, very serious trouble," he said, recommending that self-insuring companies seek "umbrella" coverage from commercial insurers to handle larger risks. Umbrella policies cover self-insured companies in the event they are hit by large damages.
Blue Cross and Blue Shield of Utah, where officials echo warnings about self-insurers being unable to cover catastrophic losses, offers these kinds of plans blending self-insurance with commercial insurance coverage.
"We have different types of approaches, different funding alternatives," said Michael N. Mitchell, vice president in charge of marketing at the insurance company.
For example, policies with self-insurers can be 80 percent commercially funded, leaving 20 percent to be self-funded, Mitchell said.
Additionally, Mitchell cautioned self-insurers from becoming too reliant on the plans because of a movement afoot to tax premiums on self-insurance programs, making self-insuring more expensive, Mitchell said.
"I think they (potential self-insurers) ought to explore all the pitfalls before they do it," he said.
But self-insurers say they've examined potential costs and other drawbacks and report some appealing savings.
Intermountain Health Care, largely self-insured since 1986, found in a recent study that by self-insuring they saved 30 percent of what it would cost commercially to fund their malpractice coverage.
The savings come in trimming administrative costs, IHC's insurance manager Harlan Hammond said. Normal insurance premiums cover the cost of maintaining the loss fund and paying for administrative costs and also must account for a profit margin.
"We can take the latter elements and instead of paying them to an insurance company, we can do the administrative work ourselves," Hammond said.
An independent actuary consultant compiles IHC's previous loss figures and estimates how much the company should pay into their self-insurance fund, budgeted separately from operational items to maintain its integrity, Hammond said.
IHC's reasons for self-insuring primarily in liability, property loss and their workers' compensation fund, which is government regulated are mostly economic, Hammond concedes. But the practice also gives IHC a comfortable feeling of controlling their own interests.
"We feel a responsibility when we have caused or created damage to be able to settle the situation appropriately," he said.
Self-insurers face the prospect of being directly and solely responsible for damages, and consequently many become zealously safety conscious.
IHC has developed a strong risk management program, Hammond said. Strict guidelines are followed by health care workers to protect workers from contracting acquired immune deficiency syndrome. Additionally, motor vehicle record checks are conducted on drivers annually to see if workers are driving safely.
Besides self-insuring, other corporations are forming insurance pools to avoid the high cost of premiums. The practice is popular among municipalities in Utah and across the nation.
The Utah Local Government Insurance Trust and the League of Cities and Towns have formed such pools. So has the Utah Municipal Risk Management Association, which boasts a membership of 40 municipalities throughout the state, said Bryce McEuen, the association's director.
"The cities in our organization were just abandoned by the commercial market so we formed our own pool," he said. Salt Lake City and Salt Lake County, Weber and Utah County, as well as other municipalities, have banded together to form the pool.
The organization, regulated by the State Insurance Department and other federal regulations, is required by statute to maintain a $600,000 "unencumbered and available" fund to cover possible damages, McEuen said. Additionally, the pool maintains its own pool insurance fund in the millions of dollars, he said.
Although savings figures for the group have never been calculated, McEuen said the pool concept is highly efficient. "It's much more feasible to pool their risks with other cities," he said.
Experts speak of the insurance crisis of 1985 during which insurers were reluctant to insure for fear of huge liability settlements. Companies found it difficult to obtain coverage as a result, they said.
Many corporations that sought refuge during the crisis by self-insuring are now wary of returning to the commercial insurance market, Erickson said.
"People are not likely to run back to the insurance market after the first crisis," she said, adding that former policyholders are turned off by wide swings in premiums and sudden additions of coverage exclusions.
"In utilizing self-insurance, there's more than just the commercial insurer to turn to," she said.