What's more, reinsurers report an alarming increase in lost-time cases involving workers over 50. Injured baby boomers are taking longer to heal and return to full function, and a real fear exists that many simply will not be going back to work. Demographics are frightening as we approach the cusp of this boomer effect.

Self-insured groups, or trusts operating in some 38 states, were forged in hard markets but can be a viable option in even the softest market if they are properly managed and marketed.

SIGs are simply groups of similar employers pooling resources to provide workers' comp coverage in a single state of operation. Trusts are regulated by each state, have joint and several liability among members, and in some states cross-SIG liability.

Excess insurance limits the exposure, and members theoretically control underwriting and the vendor selection. So how well-equipped are these programs to compete in the soft market?

SIG members generally embrace effective loss control and claim management protocols. For insurers attempting to get back in the program business, trusts represent large numbers of businessowners with up to 10 years of credible results and efficient risk management programs.

Workers' comp trusts with excellent results can be attractive for multiline programs in either traditional or captive environments. Employers that had bought into risk sharing and risk assumption on one line are ideally suited for conversion to multiline, multistate group captives.

One limitation on the SIG mechanism is that it is limited to workers' comp in the state of domicile. Thus good SIG business might be attractive to not only traditional programs but to the growing group captive segment.

In recent years individual state oversight has encouraged a critical look toward operations, reserves and the financial condition of trusts and members. Following a number of insolvencies the state invoked the cross-trust liability statutes, attempting to rebuild the workers' comp pool insolvency fund.

Litigation ensued from surviving SIGs, many of which were unaware of these provisions because of less than ideal marketing. At the same time, Illinois put a moratorium on new trust formations and tightened rules. The Illinois insurance department began enforcing a more strict definition of homogeneity and pumped up audit capabilities.

Surviving trusts, as a result, are generally in excellent financial shape.

One concern, however, is the relatively high rate of service costs. Illinois has only a handful of trust administrators that almost always bundle claims, loss control, broker and administration services. Lack of competition and continued use of a percent-of-premium pricing approach leaves much room for expense improvements.

The percent-of-premium approach to pricing is inappropriate when trusts grow to $5 million-plus. Our experience in multiple states shows that actual costs of providing underwriting and policy services can be measured from a time and materials standpoint, with a fair profit margin added. This method can result in hundreds of thousands of dollars in savings.

On the claims administration side, per-claim pricing often can show significant savings over the percent-of-premium method. While all accounts are different, we recently demonstrated a combined (claim and administration) savings of $750,000 to a trust with about $10 million in premium. Saving $750,000 in expenses for trusts with 20-to-25 members represents a competitive anchor that will sink membership as competition increases.

In Massachusetts, trusts or SIGs have been relatively healthy since formation, yet membership dips predictably during soft markets.

Massachusetts has never been faced with a SIG insolvency or impairment. The original enabling legislation was much more stringent in defining homogeneity and did not allow cross-SIG liability.

However, a low rate level coupled with medical cost inflation has driven many carriers from the state, making SIGs a viable and welcome option. In Massachusetts, even though there are only a handful of administrators, bundled and unbundled options are available and pricing flexibility and creativity prevail.

Today's SIGs should be in a position for greater rate flexibility and should have a substantial history of dividends. These features should help SIGs compete in any marketplace.

Trustees and officers, however, need to take a hard look at expenses and the pricing mechanism. Moreover, SIG boards have become too comfortable with the status quo.

Competitive bids are rarely taken, and in many states there are simply too few qualified administrators. In some instances administrators have so much control that members don't even realize they are self-insured and owners–they think it is the administrators' program.

In most cases the program is fully bundled with one vendor providing all primary services–much the same way as insurance companies. This bundled approach results in a loss of control and accountability.

Members left traditional markets to find reliable cost-effective coverage. With tens of thousands of dollars in excess expense, member loss funds suffer. Those expense savings will be critical in competing with the new wave of competition. Just imagine having the ability to increase dividend payments or apply greater schedule credits.

Robert L. Barrese is executive vice president and manager of Assurance Agency Ltd.'s alternative market group in Rolling Meadows, Ill.

“For insurers attempting to get back in the program business, trusts represent large numbers of businessowners with up to 10 years of credible results and efficient risk management programs.”

Robert L. Barrese