Members of a self-insurance group (SIG) in Kentucky are learning a harsh lesson in joint and several liability. More than 4,000 employers who are or were members of AIK Comp, a plan promoted by Associated Industries of Kentucky, face some $51 million in unfunded claims. Apparently, AIK reserves were insufficient to cover claims, and now all current members — and even some former members — are liable for the shortfall.
In workers comp, insurers often refer to the long tail. Essentially, this means that the costs of the claim extend well beyond the actual event or occurrence that the insurance covers. With most types of insurance, if a claim occurs, the payment is made within a short amount of time. With workers comp, payments cover medical costs and wage replacement (also called indemnity payments) over the life of the claim. Insurers estimate the ultimate cost of the claim and set aside reserves, the amount estimated as necessary to pay claims. In recent years, underreserving has been a factor in the demise of some very prominent insurers.
It’s too bad to see such a mismanaged pool because well-run SIGs can be viable and beneficial alternatives for small to mid-size employers that would not qualify for stand-alone self insurance. Recently, an A.M. Best report demonstrated that SIGs and captives often outperform traditional insurance programs:
“The combination of at-risk member capital, as well as joint and several liability, is a strong incentive to control losses, minimize frictional expenses, and detect and control fraud, according to the report. These factors benefit the results, with the five-year average loss and loss-adjustment-expense ratio for rated self-insurance pools at 60.6, vs. 89.3 for captives and 80.8 for A.M. Best’s commercial casualty insurance industry composite.”
Employers need to conduct rigorous due diligence before joining a SIG. As with any self-insurance program, they need to ensure their own house is in order and their loss experience is good – there are no shortcuts for good loss control; employers also need to ensure that the prospective SIG is very cautious in selecting its members, both in terms of member financial solvency and in terms of risk management and loss control requirements. If the entry threshold is low, that should be a serious sign for caution.