Employer Funding Mechanisms Manual

Employers can elect to take on insurances risk and self-insure, they can transfer risk to an insurance carrier by purchasing a fully-insured plan, or they can purchase a complex alternative funding product, which is a hybrid of the two.

The funding mechanism chart compares fully-insured and self-insured funding at a high level and provides employers some key considerations in choosing between the two funding options. The chart compares who takes the insurance risk, typical employer size for each funding type, and how employers manage risk under each funding arrangement.

Question

Self-Insured (SI) Arrangement

Fully-Insured (FI) Arrangement

Who takes the risk?
  • The employer takes the risk.
  • The employer is liable for all claims and the insurance company provides administrative services (e.g., enrollment, care management, and claim payment).   
  • The insurance company takes the risk. 
  • In exchange for a fixed premium, the insurance company pays claims for all covered services.
Typically, what size employer chooses this arrangement?
  • Choosing to self insure is most common for employers with a minimum of 500 employees.
  • Most small groups purchase FI coverage.
How is risk managed by employers? 
  • Specific and/or group-wide claims that exceed specified thresholds.
  • Alternative funding arrangements are complex and sometimes used by very large employers with sophisticated support teams of consultants or brokers.  
  • With FI plans, employers remove risk by paying a fixed premium, although they lose the potential to share in the profit margin paid to the insurance company in premiums.