Brokers

Risk Management – Charges, Commissions, and Retention

One key advantage is flexibility in controlling risk. Self-insuring allows employers to devote more of each dollar toward medical claims by eliminating insurance commissions, risk charges, profits, and other carrier costs (such as marketing and overhead). Employers also gain more control over administrative expenses.

Improved Cash Flow

Self-insuring means claims are funded as they are paid, rather than prepaid through premiums. Fully insured premiums often include projections of future cost increases, which can be higher than the actual rise in costs. By paying claims as they occur, employers can retain funds longer and manage cash flow more effectively.

Innovative Plan Design and Control

Because the employer is the plan fiduciary, decisions about plan design remain in-house. Self-insured plans are not bound by state-mandated benefits, allowing flexibility in tailoring coverage to the workforce. This can include modifying language to fit specific needs and creating a more attractive overall compensation package.

Value-Based Benefits and Wellness Programs

Self-insuring allows employers to emphasize prevention and chronic care management. Plan sponsors can design wellness programs, health risk assessments, and disease prevention initiatives tailored to employee demographics and needs.

Specific Stop-Loss Coverage

Specific stop-loss insurance protects the plan against large individual claims. For example, with a $50,000 deductible, if an employee’s claims total $300,000, the stop-loss carrier reimburses the plan $250,000. Premiums are typically calculated on a per-employee or composite basis.

Stop-Loss Contract Types

Unlike traditional insurance, stop-loss protects the employer rather than the employee. A common first-year arrangement is the 12/12 contract (“incurred and paid”), which requires claims to be both incurred and paid during the same 12-month policy period for reimbursement.

Are You a Candidate for Self-Insurance?

While the advantages are clear, not every employer group is suited to self-insurance. Groups with steady employee populations, stable claims experience, and some tolerance for risk are best positioned for success. Even with stop-loss protection, the employer is still responsible for claims up to the deductible.

Employers who are willing to take a more active role in plan design and management will benefit most from the flexibility and cost control self-insurance offers.

Potential claims-related cost savings

Unspent claims funding is retained by the employer. In fully insured plans, those funds remain with the insurance company.

Greater control of plan design

Employers can customize benefits to meet their workforce’s needs, determine employee cost-sharing, and choose how much risk to assume. ERISA-governed plans are not subject to state benefit mandates.

Ability to manage risk

Employers control expenses through their claim payment and negotiation policies.

Risk transfer

Employers can limit exposure by purchasing stop-loss insurance, forming a captive, or using other strategies.

Maintenance of reserves and improved cash flow

Instead of prepaying insurers, employers fund claims as they arise. Reserved funds can be invested to generate income.

Lower plan administration costs

Insurer premiums typically include 15–20% for administration and profit. Third-party administrators (TPAs) and administrative services only (ASO) fees are usually much lower.

Reduced premium taxes

State premium taxes (1.5–3.5%) apply only to stop-loss coverage, not the full cost of the plan.

Elimination of state-mandated benefits

Self-insured plans, regulated under ERISA, are not bound by state benefit mandates, potentially lowering costs.

Ability to contract directly with providers and networks

Employers can select provider arrangements that best fit their employees’ needs, rather than accepting insurer-defined networks.

Access to claims data

Employers receive regular reports on medical and pharmacy claims, improving decision-making and cost management.

Managing cost drivers

High-cost, high-risk chronic conditions can be identified and better managed, lowering long-term costs.

Plan flexibility

Employers are not restricted to annual renewal cycles and can make changes as needed in response to market conditions.

Cost stability

Self-insurance reduces exposure to steep annual rate increases from commercial insurers.

Financial risk assumption

Employers are responsible for paying all covered claims. Stop-loss insurance can help, but the employer is liable up to the deductible or aggregate limit.

Increased management involvement

With greater control of plan design comes the need for more time and effort from management to create and adjust the plan.

Administrative responsibility and legal liability

Self-funded plans must be administered by the employer or a third-party administrator (TPA/ASO). Even with outside help, employers must provide oversight. Failure to maintain an efficient system can be viewed by the Department of Labor (DOL) as a fiduciary breach.

Unpredictable cash flow

Claims can fluctuate significantly month to month. Even with actuarial projections, actual obligations may exceed expectations. Under ERISA, clean claims must be paid within 30 days.

Asset exposure

Employers may face liability if the plan is involved in legal action.

Adverse claims experience

Poor claims history can drive up the cost of stop-loss coverage, making self-funding uneconomical over time.

Long-term commitment

It can take three to five years before the financial benefits of self-funding outweigh the initial and ongoing costs.

Reduced PPO discounts

Smaller self-funded groups may receive lower discounts from provider networks compared to large insurance companies.

When evaluating whether self-insurance is appropriate, consider the following factors:

Resources

• Financial strength and steady cash flow to cover claims
• Management bandwidth to oversee plan design and administration

Motivation

• Desire to provide strong support for employees’ health needs
• Confidence they can manage employee health more effectively than an insurer
• Interest in greater flexibility in plan design

Risk Awareness and Mitigation

• Understanding of fiduciary responsibilities under ERISA
• Alignment of short-term and long-term financial goals
• Knowledge of stop-loss insurance options to limit exposure

Providing self-insurance opportunities positions brokers and consultants as trusted advisors rather than simple order-takers. Employers increasingly need customized solutions as health care costs rise and “one-size-fits-all” plans fall short. By guiding clients toward innovative self-insured strategies, brokers can help them take charge of their health plan destiny.

Key opportunities include:

• Becoming the self-insurance expert in your market – Differentiate from competitors and add unique value.
• Helping clients escape commoditization – Every employer is different, and self-insured plans reflect those differences.
• Promoting long-term vision – Assist clients in setting health plan goals and building strategies to meet them.
• Demonstrating creativity – Use data and flexible plan design to bring forward innovative, outside-the-box solutions.

Relationship benefits for brokers/consultants:

• Strengthens the long-term client bond
• Produces beneficial outcomes for the client
• Establishes the broker as a trusted advisor
• Opens the door to client referrals and new opportunities

Brokers and consultants may be compensated through fees, commissions, or a combination of both.

Fees

• Can be charged as an annual flat fee or a per-member/per-month (PMPM) fee.
• May apply to plan administration, stop-loss premiums, or both.
• Typically determined at the start of the plan year and collected annually or monthly.

Commissions

• Usually based on a percentage of the stop-loss premium, commonly between 5–15%.
• If a third-party administrator (TPA) places the stop-loss coverage, the commission may be shared between the broker and TPA.

Transparency

• All compensation arrangements should be fully disclosed to the client to ensure clarity and trust.

Success in the self-insurance marketplace often depends on strong relationships with third-party administrators (TPAs) and other service providers.

Tips for brokers:

• Establish solid connections with TPAs and other industry service providers.
• Use industry-specific directories to identify potential partners.
• Get involved with professional organizations such as the Self-Insurance Institute of America, Inc. (SIIA) to stay informed and build your network. Learn more at www.siia.org.

Summary Plan Description (SPD): The written statement of a plan required by ERISA. It must be easy-to-read and include eligibility, coverage, employee rights, and appeal procedures.

Mandated Benefits: Coverage that an insurer or plan sponsor is legally required to offer. State laws determine which benefits are mandated.

Plan Year: The 12-month period in which deductible and co-insurance accumulate toward a participant’s out-of-pocket maximums.

Reinsurance: Another term for stop-loss coverage.

ASO (Administrative Services Only): A contract with an insurer to provide administrative services only; no insurance protection is provided.

Benefit Booklet: A booklet explaining plan benefits and related provisions for employees.

Employee Retirement Income Security Act of 1974 (ERISA): Federal law establishing rules for self-funded group health plans and protecting participants’ interests.

Fiduciary: A person who holds or controls property for the benefit of another. Under ERISA, fiduciaries must act solely in the interest of participants and beneficiaries, discharge duties prudently, and follow the plan document.

Plan Document: Explains the provisions of a plan, including benefits and participant rights.

Plan Participant: An employee or dependent covered by the health plan.

Plan Sponsor: The employer, employee organization, or association responsible for maintaining the plan.

Third Party Administrator (TPA): A firm that collects premiums, pays claims, and provides administrative services for the plan.

PPO or Managed Care Network: A network of hospitals and providers offering services at reduced rates. Includes regional/national PPOs and carrier networks like Blue Cross, Cigna, or United.

Medical Management: Services to manage plan assets, including routine claims, case management, and clinical interventions. Can reduce costs by focusing on prevention and wellness programs.

Aggregate Stop-Loss: Insurance limiting overall annual claims liability, reimbursing the employer when total claims exceed a preset level.

Attachment Point: The threshold at which aggregate stop-loss reimburses the employer based on cumulative claims.

Contract Period: The time frame in which a claim is incurred and must be paid to qualify for stop-loss reimbursement.

Run-In: Claims incurred before a plan year but reported after the end date. Paid under the current-year contract including the run-in period.

Run-Out: Claims incurred during a plan year but reported after the end date. Paid under the prior-year contract.

Binder Premium: The first month’s premium required to initiate stop-loss coverage.

Specific Stop-Loss: Reimbursement for claims exceeding the individual deductible during a contract period.

Specific Deductible: The amount of claims the plan is responsible for per individual in a contract period.

Expected Paid Claims: Estimated dollar value of claims to be paid during a plan year or contract period.

Exposure: The extent of risk, measured by participation, demographics, or amounts at risk.

IBNR: Incurred but not reported claims.

Incurred Claims: Claims for which a liability has arisen under the insurance contract.

Lag: Delay between occurrence of a claim and its payment, including IBNR and reported but unpaid claims.

Paid Claims: Total dollar value of claims paid during the plan year.

Policyholder: The employer.

Stop-Loss Carrier: Insurance company providing specific and aggregate stop-loss coverage for the plan sponsor.

Claim Cost Negotiation: Negotiation with providers for predetermined rates or reductions in charges.

Disclosure Statement: Form notifying stop-loss carriers of large or ongoing claims prior to binding coverage.

Reimbursement: Compensation to the employer for claims exceeding specific or aggregate deductibles.

Self-Funding: Paying claims directly instead of purchasing conventional insurance, typically using a TPA and stop-loss coverage.

Shock Loss: A large loss significantly impacting a group, usually claims exceeding 50% of the specific stop-loss deductible.