1. The Basics of Self Funding1

2. Daniel R. Meylan Insurance Professional Since 1973
P&C and Benefits Broker
Agency Owner
Agency Senior Executive
Agency Acquisitions and Valuations
Self Insurance, Captives, RRGs
Bank Agency Operations
Husband, Father, Grandfather

3. The Basics of Self Funding Key Questions
What is self funding?
When should self funding be considered?
Principles of self funding.
Who uses self funding?
What type of risks can be self funded?
What is the operational structure of a self-funded program?
What are the types of self-funded programs?
What are the costs associated with a self-funded plan?
What is the process of setting up a self-funded plan?
Small group level-funded health plan.
Sample Cases – Successes & Failures

4. The Basics of Self Funding
The foundation of self funding:
Self funding or self insurance is ultimately
a function of claims costs and the
predictability of and control
over claims activity.

5. The Basics of Self Funding
What is self funding?
Self funding is accepting the risk of loss as
part of the operational expenses of the enterprise
and limiting the ultimate exposure to the
enterprise by purchasing some form
of excess insurance.

6. The Basics of Self Funding
Who engages in self funding?
Most enterprises with 500 or more full-time employees utilize self funding as part of their risk management strategy.

7. The Basics of Self Funding
Self funding requires:
Cash
Claims data
Management involvement
Some level of insurance protection

8. The Basics of Self Funding
Why self funding?
Less expensive – improves profits
More control of costs
Manages unique risks

9. The Basics of Self Funding
Self funding structure:
Working layer – Claims paid from the revenues and cash flows of the enterprise
Excess Layers – Stop-loss insurance purchased to protect against catastrophic loss exposure
Working Layer
Excess Layers

10. The Basics of Self Funding
Self funding terminology:
Loss Fund – Claims paid from cash flows of the enterprise
Specific Stop Loss – Insurance protection against singular catastrophic events – “severity exposure”
Aggregate Stop Loss – Insurance protection against the cumulative effect of numerous claims – “frequency”
Loss Fund – Cash Flow
Specific Stop Loss
Aggregate Stop Loss

11. The Basics of Self Funding
Risks that can be self funded:
Workers Compensation
General Liability
Professional Liability
Product Liability
Group Health Insurance
Auto Liability
Environmental Liability

12. The Basics of Self Funding
Who is a candidate for self funding?
“When the cost of transferring risk
(buying insurance) exceeds the cost
of self insurance it is time to self fund.”

13. The Basics of Self Funding
Conducting a self funding feasibility analysis:
Analyze accurate loss data (3-5 years currently valued)
Evaluate the company’s financial resources
Select a self-funded structure
Determine the cost-appropriate reinsurance
Determine the cost and structure of a claims administrator
Determine the structure and cost of safety and loss control
Determine regulatory approval cost and process if required
Evaluate final cost against other risk transfer alternatives

14. The Basics of Self Funding
Types of self-funded plans:
Risk Purchasing Group – RPG
Risk Retention Group – RRG
Retrospectively rated plan
Rent-a-captive
Wholly owned captive
Self-Funded WC Program
Self-Funded Group Health Program
Level-Funded Plans
MEWA – Multi Employer Welfare Arrangement

15. The Basics of Self Funding
Financial components of a self-funded program (100 pennies in $1)
Policy fees
Premium taxes
Stop-loss insurance
Loss control services
Marketing costs
Claims administration
Claims costs
Investment income
Collateral costs
Underwriting profit or (loss)

16. The Basics of Self Funding
10 Financial Components of a Self-Funded Program
Policy fees – The cost to underwrite issue and administer the policies including endorsements and billings.
Premium Taxes – Taxes and fees due federal, state and local regulatory authorities and regulatory compliance costs.
Stop loss insurance – Coverage purchased from insurance carriers to defray catastrophic risk exposures.
Underwriting and Loss Control Services – Safety training, premises inspections,
on site risk evaluation, analysis of claims activity to predict and prevent future losses.
Marketing Costs – Fees and commissions paid to the distribution system, licensed agents, brokers and carriers.
Claims Administration – The cost of servicing and managing claims activities including tracking and analyzing of claims history.
Claims Costs – The actual ultimate cost of all claims including litigation and allocated loss adjustment expense.
Investment Income – Interest earned on funds in excess of expenses and paid claims.
Collateral Costs – Costs associated with letters of credit or other financial guarantees.
Underwriting Profit or (loss) – (Premiums Paid + Investment Income) – (Fixed costs + claims and related expenses) = profit or (loss).

17. The Basics of Self Funding aka “Level Funding”
Level-Funded Small Group Health Plans
An alternative to the ACA cost increases
Lower costs for groups with favorable claims experience
Claims history determines final costs
Maximum employer liability is fixed
Turn-key level-funded plans available for groups with 2 or more covered lives

18. What is the Difference Between Self Funding and Level Funding?
The employers ultimate costs are variable and unknown and based entirely on the cost of claims
Typical for employers with 100 FTES or more
Level Funding
The employer’s ultimate costs are capped and limited to a specified dollar amount
Typical Level Funded Plans are limited to 12 monthly payments
Available for groups as small as 2 lives

19. Why Level Funding for Small Employers?
Long Term – It’s the most cost effective way to finance a group health plan
Reduces insurance company profit
Eliminates state insurance premium taxes
Eliminates state benefit mandates
Allows employer to take control of group benefit plan
Money not spent on claims belongs to the employer – not the insurance company
May avoid the negative rate impact of ACA

20. Self Insured WC Case Study – Success Story
Client: Retail Grocers Association – 750 retail stores in 5 states
Type of Program: Wholly Owned Captive
Total Payroll: $225M
Standard Premium: $ 19M
Per Store Premium $ 25,500
Premium Rate % of payroll
Premiums Paid $7,344,000 
Specific Stop Loss: $250,000 per claim
Aggregate Stop Loss: 94% of standard premium
Total Incurred Losses: $3,071,000
Policy Fees $ ,000 (1.96%)
Premium Taxes $ ,320 (3.00%)
Reinsurance $ ,840 (11.00%)
Loss Control $ ,200 (5.00%)
Marketing $ ,625 (7.51%)
Claims Admin. $ ,511 (5.29%)
Incurred Losses $ 3,071,000 (41.82%)
Investment Income ($ ,000) (+9.25%) 72 months
Collateral costs $ ,000 (0.3%)
Total Program Costs $ 4,895,496 (66.66%)
Underwriting Profit $ 2,448,504 (33.34%) 
Net Savings per store $ ,502

21. Self Insured WC Case Study – Unsuccessful Story
Client: Private Security Firm – 1600 employees in 12 states
Type of Program: Rent-a-Captive
Total Payroll: $44,000,000
Premium Paid: $ 7,040,000
Premium Rate $16.02 per $100 of payroll
Specific Stop Loss: $500,000 per claim
Aggregate Stop Loss: 140% of standard premium
Total Losses: 335
Total Incurred Losses: $6,794,000
Program Costs:
Policy Fees $ ,000 (1.96%)
Premium Taxes $ ,000 (6.00%)
Reinsurance $ 1,267,000 (16.00%)
Loss Control $ ,600 (4.00%)
Marketing $ ,000 (5.00%)
Claims Admin. $ ,300 (6.25%)
Incurred Losses $ 6,794,000 (96.50%) within retention
Investment Income ($ ,000) (+4.51%) 72 months
Collateral costs $ ,000 (1.6%)
Total Program Costs $ 9,476,900 (134.62%)
Underwriting Loss $ (2,448,504) (34.62%)
 Final Rate Per $100 of payroll $21.54 per $100 of payroll

22. Group Self-Funded Arrangements
MEWA
Multi Employers Welfare Arrangements
A MEWA is a self-funded arrangement that
allows multiple small employers to band together
to form a group self-funded arrangement that
shares risk across multiple small employers.
MEWA’s are only allowed in 6 states.

23. The Basics of Self Funding
MEWA
Multi Employers Welfare Arrangements
Key MEWA features:
Each employer’s employees are medically underwritten
Program is not “guaranty issue”
The MEWA may discriminate by charging higher rates to less healthy groups and declining unhealthy groups
MEWA’s are subject to Insurance Dept. regulatory oversight
MEWA’s are ERISA compliant
MEWA’s are permissible as an alternative to ACA in some states

24. The Basics of Self Funding
Final Observations on Self funding
Self funding is always a risk management alternative
Self funding is not always prudent
Self funding requires active management involvement
Self funding assumes predictable claims experience
Self funding usually includes risk transfer through insurance at some level
Self funding ultimately reduces long term risk management costs

25. Thank you! Question & Answer Session
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