Put simply, a SIG is a group made up of firms in similar industries that pool resources to insure each others exposure. Risk managers pay premiums to the SIG, which acts as the insuring mechanism for the members. Claims are paid from the pool of premiums and the members control the operation of the group.

SIGs have been in existence for years and have been proven as a very successful alternative in helping clients take control of their workers comp programs. Many states have enacted legislation authorizing self-insurance groups, calling them either SIGs or Trusts. Regardless of the name, they function in much the same manner and allow risk managers the ability to control their own destiny.

Risk managers must first evaluate whether a SIG is for them by examining the benefits of membership:

Since each SIG is completely owned by its members, all of the underwriting profits and investment income belongs to the membership. A well-managed SIG will return significant dollars to its members in the form of dividends.

In a climate where underwriting markets are drying up, SIGs offer members the ability to ensure the availability of coverage even if they are in a challenging class of business. In addition, all SIG members are in the same line of business and understand the complexities in each members operation. Members are thus shielded from the insurance-market cycles.

Since the members own the group and insure one another, there is no insurance company involved in the transaction. A board of trustees elected from the membership manages the group, and services are obtained from a third-party administrator. A TPA oversees the groups affairs, providing services tailored to the members unique needs, and will initiate programs that help prevent injuries and reduce claims costs.

While the SIG structure certainly has numerous benefits, members must understand that under this structure they agree to accept joint and several liabilities for the workers comp exposures of the group. This means that the members are responsible for expenses that exceed the premium paid into the SIG.

While this may sound a bit daunting, it is mitigated by many factors that greatly limit the financial risks to the group and its members. For instance, SIGs purchase reinsurance protection on both a specific- and aggregate basis to protect the group from excess losses.

In addition, each SIG is regulated at the state level and is accountable for strict operational and financial measures designed to ensure profitable operations. A well-run SIG will have stringent underwriting guidelines with risk-selection rules that limit membership to those candidates with credible loss histories. The underwriting guidelines are designed to keep poor performers out.

Finally, using a TPA who has demonstrated tangible results and has experience in the industry in which the SIG is formed greatly mitigates potential losses.

With scores of TPAs to choose from, the process of selecting one could be cumbersome. However, having the right TPA partner makes all the difference. Fortunately, there are telltale criteria that employers can look for:

First, determine how the service providers average cost per claim compares with national and state averages. Compare their historical data against national data, such as the NCCI.

Risk managers also should seek service providers whose primary goal is the prevention of injuries. Evaluate how focused they are on eliminating sources of injuries–both physical and behavioral. A qualified TPA should have experience managing a SIG, as the program is very different from individual self-insured clients. The TPA will be acting on the groups behalf and should be well versed in SIG operations.

Since TPAs are responsible for channeling injured employees to a preferred-provider organization as a cost-saving measure, determine their network penetration rate. TPAs that effectively channel injured workers into a network of specialists will be able to influence severity and lower average claim costs.

Finally, seek a partner that uses real-time tools and report cards to signal potential breakdowns in the system before they become serious and costly problems. For instance, e-mail alerts that signal when an injury isnt reported within 24 hours or when transitional duty isnt available go a long way in keeping a program on track.

In short, work with a full-service partner who works smart, is focused on long-term outcomes, and is an expert in claims, case management and managed care. Beware of hidden costs, scrutinize price add-ons, and resist the urge to unbundle the individual services provided.

In the difficult workers comp market of the mid-1990s, self-insurance groups flourished as employers, disenchanted with the traditional market, sought to control their own destiny. As the market again heads in that direction, SIGs are again a favorable option.

Richard OBrien is vice president, marketing, for ManagedComp, a Woburn, Mass.-based underwriter and third-party administrator specializing in alternative markets. He can be reached at 781-938-2221 or via e-mail at [email protected].

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, April 15, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.