In a recent news article, attorney Tommy Gallion railed against "workers compensation self-insure... ALABAMA VOICES: Attorney c

In a recent news article, attorney Tommy Gallion railed against "workers compensation self-insured group funds" because he is not privy to their financial records and laments that they are not regulated by the insurance department. He further complains they have a competitive advantage over his commercial insurer clients.

Having spent the last 25-plus years heavily involved with workers compensation group self-insurance funds, as well as individual employer workers compensation self-insurance programs, and with many commercial insurers and reinsurers, I felt it was appropriate to respond to what I feel are his weak-kneed and self-serving charges.

As Mr. Gallion well knows, the term self-insurance means there is no insurance company assuming the responsibility to pay claims. Rather, it is the business firm itself, or a group of business firms collectively, that pay the claims from out of their own assets. Many of the largest businesses in Alabama, household names, are individually self-insured for workers compensation, medical benefits and some forms of business liability claims.

A goodly number are members of a group self-insurance fund, as are many governmental entities. Alabama is, and has been, blessed to have a number of very well run and financially strong group funds, some of whom have been operating for 30 years or more.

The largest provider of workers compensation coverage in the state is a group fund and its record over the past decade is without peer. This fund has returned well in excess of $100 million to its members over the past decade. The reason individual businesses, cities, counties, etc., and the various group funds covering their own workers compensation exposures are not regulated by the insurance department should be obvious.

No insurance company is liable for their claims. By definition, self-insurance is non-insurance because no insurance company writes the checks to pay claims. The individual business and individual groups are liable for and pay their own claims out of their own assets. There are a number of obvious reasons why commercial insurers can't compete with these group funds.

First and foremost, the funds are not-for-profit operations with excess monies returned to the fund members; second, they have very strict selective criteria for who may join the fund; third, their loss control and claim handling practices are exemplary and lastly, their cost of doing business is lower because, since they are deemed to not be insurance companies, they therefore pay no insurance premium taxes to the state.

As I said, they are not for profit. They serve only their members and their profits, if any, go to them. Not every group that ever applied to the Department of Industrial Relations for the authority to start up a workers compensation fund -- and many have over the years -- was granted that authority, just as many individual companies who applied were not been allowed to self-insure. In the opinion of the DIR, after a careful review of all submitted data, their financial strength simply did not warrant them assuming their own risks.

The financial strength of a group workers compensation fund is not limited to its own assets because it also has the additional backing of the combined assets of all members. All group workers compensation self-insurance funds in this state are backed by the full faith and credit of every member of the fund under Alabama's Joint and Several Liability Agreement. Every member must sign this agreement before joining the fund.

In addition to this safeguard, the DIR requires a certified financial statement annually and also requires an actuarial analysis report regarding the adequacy of the fund's loss reserves. Further, DIR requires that each of these funds purchase excess reinsurance from highly rated commercial insurers to protect the fund's assets from being imperiled due to the occurrence of one or more huge catastrophe losses.

Commercial insurers of workers compensation do the very same thing to protect their balance sheets. A combination of common sense and good risk management techniques on the part of individual businesses and governmental entities that self-insure themselves for any form of risk exposure also mandates that they purchase excess reinsurance against their own possible catastrophe loss or losses to avoid imperiling their assets.

One final caveat regarding group workers compensation funds, and that is the fact they were created out of necessity because commercial insurers would not write coverage for their members for a variety of reasons.

Commercial insurers serve a valuable role in this country and have since Ben Franklin created the first one more than 200 years ago. The vast majority of them are well run and financially sound. But, as public companies who must compete with hundreds of other insurers for new business, they go through cycles of being very competitive and writing just about any firm that applies for many years to being so very selective and restrictive to the point that many firms have no place to go except a group fund or individual self-insurance.

One clear example of this fact are the self-insurance malpractice liability group trust funds for doctors and hospitals that were created here in Alabama and in many other states some 30 years ago because the two or three largest writers of medical malpractice liability insurance in America shut their doors to new or renewal business. I was there when it all began in 1976.

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