Self-insurance is a system in which the employer assumes the financial risk for providing Workers' Compensation benefits to its employees. Employers that are self-insured pay the costs for their claims as they are incurred, and they only pay the costs of claims of their own employees--never the costs of other employers' claims. This is the key difference between self-insurance and a state-sponsored system. In a state-sponsored insurance system, the employer pays a fixed premium into a fund that pays the costs of not just their own claims but the costs all the injury claims in their industry in the whole state.
Large companies may benefit from being self-insured rather than buying into a pool of state-sponsored insurance.
With state-sponsored insurance, employers pay a fixed premium that is based on the following factors: their assigned
Employer’s Experience Factor
(Accident Fund Base Rate + Medical Aid Fund Base Rate + Stay At Work Base Rate)
Supplemental Pension Fund Base Rate
Number of Hours Worked
With the latter formula, the costs of state-sponsored Workers' Compensation insurance premiums can be unfairly high for large companies simply because they have a high number of employees who work a lot of hours. In these cases, the state-sponsored insurance may cost more for a large company than just paying the costs of all its injury claims out of pocket. Let's look at an example...
A specialty bake shop is assigned risk class 3901-01 (Bakeries – Retail – Specialty Shops). Suppose for 2015, this employer has an experience factor of 1.1300. Let’s further assume that there are 60 full-time workers working 480 hours per quarter which amounts to about 115,000 hours worked per year. The 2015 base rates for risk class 3901-01 are:
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