Accounting Methods

Accounting Methods

Fully Insured

This funding arrangement eliminates the risk to you, as the employer, and places it entirely on the insurer.  Premium rates are usually set for a one-year period, although longer premium rate guarantees can usually be negotiated when a market tendering is performed.  As the risk is entirely born by the insurer all losses, in the event of higher than expected claims, are theirs.  Conversely, all gains are retained in the event that claims are lower than expected.  Life and LTD programs are commonly fully insured due to the high level of risk associated with these coverages.  For STD, Health and Dental programs, fully insured arrangements can be attractive to organizations that:

  • Wish to avoid the risk associated with fluctuations in their program costs that may result from increases/decreases in claims in a given year.
  • Prefer to commit to a set annual program cost for budget purposes
  • Have unpredictable claiming patterns due to growth or reductions in the size of their employee base or are prone to high employee turnover

Self-Insuring

Also referred to as ASO (Administrative Services Only), self-insurance occurs when an entity takes on its ownclaims risk for a given benefit.  A third party is employed to “administer” the contract,or essentially, to pay claims.  Although a number of benefits advisors use self-insurance as a way to show plan savings in every circumstance, this funding arrangement is most appropriate in the following situations:

  • Risk avoidance is not the key consideration
  • Claims patterns are stable
  • There is no significant turnover, growth or reduction in the number of plan members anticipated

A general guideline is that larger organizations tend to have more predictable claims levels (due to the “Law of Large Numbers”), making ASO more palatable; while the claims of smaller companies can fluctuate more dramatically (particularly Health and STD claims), making ASO more risky.  However, not all situations fit into this generalization and Benefex will perform a detailed risk/benefit analysis at every opportunity.

Refund Accounting

When simplified down to a single statement: refund accounting is a cross between a fully insured and a self-insured arrangement.  Premium levels are set in advance each year however, an annual accounting is conducted and any gains are refunded to the client after the funding of a Claims Fluctuation Reserve (CFR owned by the client but held by the insurer).  In the event of a loss, the shortfall is taken from the funds available in the CFR.  Some clients prefer this funding option because any insurer profits, beyond a defined level, are refunded.

Points To Consider

  • The decision to self-insure should be based on facts, not on a marketing “pitch” which shows plan savings that may be overstated.
  • At Benefex, we perform a detailed comparison of funding arrangements, including a minimum three year historical analysis and a projection of future costs based on projected claims.
  • Depending on the size of the plan, 70% – 95% of the costs of the program are represented by claims. Industry experts suggest that 2% to 11% of claims are fraudulent, depending on the benefit.  If self-insurance is the chosen funding alternative, we recommend an insurance company be employed as the claims administrator.  The rationale for this is that insurance companies have reason to invest the millions of dollars necessary to detect and control fraud activity.  While various other claims paying organizations exist, it is our belief that most, if not all, are not incented nor resourced to make these valuable investments.
  • Other key elements MUST be considered before the decision to self-insurance is made. At Benefex, we believe this funding method is appropriate in many situations, but all elements of risk should be considered.  For example, self-insuring can potentially impact your attractiveness to other providers when a market review is performed.  We advise our clients on ALL of the pros and cons of these arrangements so that our clients can make an educated decision.