What is Workers' Compensation Self-insurance?

Many students I encounter assume that workers’ compensation is simply another variant of traditional insurance. However, the traditional insurance model, which involves transferring financial risk for specific perils over a set period in exchange for a premium, may only encompass around half of the total workers’ compensation and benefits paid in the US.

To understand this conclusion, let's recap the public policy objective workers’ compensation is designed to achieve and how legislators have formulated the most common workers’ compensation arrangements in North America and Australia.

The Public Policy Objective

Most developed economies have systems of social protection that offer cash benefits in case of work-related injuries. While many countries have national programs to achieve this objective, in North America and Australia, the preferred approach is to provide coverage through “workers’ compensation,” primarily enacted at the state or provincial jurisdictional level. [For a concise summary of the evolution of workers’ compensation, see Guyton GP. A brief history of workers' compensation. Iowa Orthop J. 1999;19:106-10. PMID: 10847524; PMCID: PMC1888620 Available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1888620/ ]

The public policy objective was not met in the free market.  Market failures including adverse selection issues, information asymmetries and externalization of social and other costs lead to government market interventions in most jurisdictions.  In North America and Australia, the intervention of choice was workers’ compensation.

Exclusive Remedy

Workers’ compensation is considered a form of “social insurance” and operates based on a social contract between management and labor. It stipulates that workers’ compensation serves as the “exclusive remedy” for occupational injuries and diseases. This means:

- Employers are shielded from legal suits for work-related injuries in exchange for funding the costs of statutory compensation and benefits specified by the relevant workers’ compensation statute.

- Workers are entitled to prescribed cash compensation for disability and the payment of medical and rehabilitation benefits for work-related injuries, regardless of fault.

- This system fulfills the public policy objective with less friction and provides greater certainty compared to the alternative model of litigating fault.

Legislation Determines the Mandate, Rules, and Arrangements

Legislation in the United States, Canada, and Australia defines the mandate of workers’ compensation at both the state/provincial and federal levels. This includes coverage extent, benefit definitions, dispute resolution rules, and more. Regulations and policies governing workers’ compensation in specific jurisdictions stem from these statutes.

Which employment is covered varies by jurisdiction although coverage percentages vary.  Workers’ compensation legislation mandates coverage for most, if not all, employers. Coverage calculation methods vary [note the denominators carefully]; according to the National Academy of Social Insurance (NASI) in the US, 91.7% of total employment and 87.3% of all jobs (2020 data) are covered by workers’ compensation. The International Labour Office (ILO) estimates about 72% of the working-age population has work-injury financial protection (2020-22 data) in Australia. The Association of Workers’ Compensation Boards of Canada (AWCBC) reports that 83.4% of the employed workforce is covered by workers’ compensation (2022), with coverage levels in the range of 91-98% in more than half of the jurisdictions.

Legislation also determines how the workers’ compensation will be provided.  While there are many variations, the two most prevalent arrangements are traditional insurance and self-insurance.

Traditional Insurance Arrangements for Workers’ Compensation

Most legislative frameworks primarily rely on a “traditional insurance” model, mandating and regulating the market for insurance buyers and sellers.  

Statutes in the US, Canada and Australia define two main alternative arrangements to provide workers’ compensation insurance :

• Competitive insurance (including mutual insurers, private insurers)
• State Fund or Provincial workers’ compensation insurers (exclusive or competitive)

Legislation typically mandates employers to obtain workers’ compensation insurance from a private insurer, mutual insurer, or a state/provincial fund (competitive or monopolistic entity). 

Besides the traditional insurance model, legislation or administrative arrangements may also prescribe another arrangement for workers’ compensation coverage: Self-insurance.

Differentiating Insurance and Self-insurance

Traditional insurance involves transferring financial risk in exchange for premiums paid to an arms-length entity, such as a private insurer or state fund, where the risks of multiple employers are pooled. However, not all workers’ compensation coverage aligns with this definition; certain forms of workers’ compensation constitute “self-insurance.”

In self-insurance, authorized or mandated by jurisdictional authority, a self-insured firm retains financial risk rather than transferring it to an arms-length insurer. The employer remains liable for the workers’ compensation and benefits prescribed by the governing workers’ compensation statute.

The retention of financial liability presents a risk to the self-insuring entity. Firms approved by the state for self-insurance have an incentive to develop robust health and safety, disability management, and return-to-work programs. This choice may make sense for firms believing that their robust loss prevention programs limit financial risk more effectively than the pooled alternative offered by traditional workers’ compensation insurance through premium payments.  Self-insured entities may also mitigate some risk through re-insurance arrangements.

While self-insured employers may contribute to oversight, regulation, dispute resolution, research, enforcement, and other system costs through assessments, the liability for their own workers’ compensation claims costs is retained. Generally, self-insured entities will have to post security or other financial undertakings as part of the approval process. 

Categories of Workers’ Compensation Self-insurance

Self-insurance in workers’ compensation does not fit one standard form.  The following categories account for most workers’ compensation self-insurance models. 

Self-insurance with Self-administration: Many large employers operating across multiple jurisdictions see advantages in consolidating their workers’ compensation administration in-house or with an external private third-party administrator (TPA). Subject to jurisdictional approval and oversight, this approach may streamline services, particularly in returning injured employees to work. 

Self-insured and self-administered employers may still have to pay assessments or contributions to state funds,  regulatory agencies (including health and safety inspectorates), appeal structures, fraud prevention,  research, and prevention programs.   

Group Self-insurance: Multiple employers, usually from the same industry, pool resources to provide workers’ compensation coverage for their employees, contributing to a fund used to pay claims.  Creation of such groups or associations must meet regulatory authority requirements that vary by jurisdiction.  New York State allows Self-Insurance Groups with provisions that include the following:

The group must include two or more employers that perform related activities in a given industry.

The employers must have been in business for an “acceptable”  period of time.

The group must meet and continue to meet the current legal provisions, including security deposit posting requirements.

[see Title 12 of the Official Compilation of Codes Rules and Regulations of the State of New York, Chapter V, Subchapter B, Part 317 available at https://www.wcb.ny.gov/content/main/SelfInsureds/Part317.jsp ]

Self-insurance through State/Provincial Funds: In certain jurisdictions, state governments self-insure workers’ compensation coverage costs but contract with a state or provincial fund as an adjusting agent to deliver workers’ compensation services, with the ultimate liability for payments remaining with the government.  North Dakota, Puerto Rico and California governments are examples of this form of self-insurance.

This model is not limited to government employers.  In British Columbia, WorkSafeBC covers a limited number of self-insured private employers (including Air Canada, BNSF Railway, Canadian Pacific Railway, Teck Resources) in addition to the provincial government and its corporate entities.

Unlike other employers who pay premiums based on assessable payroll and pool their risk with other similarly classified employers, these “deposit class” employers do not pay premiums.  Instead,  each of these employers reimburses the cost of all compensation and benefits associated with their workers’ claims plus a share of administration and other assessments (prevention, appeal structures, etc.)

Direct Self-Insured Governments: Entities like the US Federal Government self-insure workers’ compensation under specific legislation, with the government covering its own claims and expenses pursuant to the Federal Employees Compensation Act (FECA).  The  Office of Workers’ Compensation Programs (OWCP) provides adjusting and legal services for the federal government’s workers’ compensation claims and provides benefits and services to injured employees. The federal government reimburses the OWCP for the cost of these services.

Australia’s federal no-fault workers’ compensation scheme is created under the Safety Rehabilitation and Compensation Act 1988 (SRC).  ComCare handles the claims including payments, medical expenses, are related benefits.   

The Canadian Federal Government also self-insures workers’ compensation for its employees under the Government Employees Compensation Act (GECA) but contracts with the provincial workers’ compensation boards to administer the claims for workers in the respective jurisdictions where they reside.

Self-insurance through “Captive” Insurers and Related Alternatives: Large corporations may retain risk through wholly owned subsidiaries or captive insurers, while groups of entities can form captives, associations, or other entities to manage risk.

Other forms of self-insurance in this category include risk retention groups, risk purchasing groups, trusts,  and captives sponsored by intermediaries.

“Carve-outs” as a Form of Self-insurance: Labor-management agreements meeting specific requirements set and approved by the state, may seek to state approval to exclude themselves from standard workers’ compensation insurance mandates, provided they offer benefits equal to or better than those mandated by the workers’ compensation system. Carve-outs generally provide workers’ compensation benefits and dispute resolution under a collective agreement. California has several carve-out plans in the construction sector.  [see Department of Industrial Relations, Labor-management (carve-out) agreements available at https://www.dir.ca.gov/dwc/carveout.html ]

Self-insurance through Deductibles: Many US states permit policies with employer deductibles, where the employer reimburses the workers’ compensation insurer for cash compensation and benefits paid up to a specified deductible amount on a case or overall policy basis.  Employers are essentially self-insured for the deductible portion of their policy.  In the US, these policies are generally called “Large Deductible” workers’ compensation policies.  In Australia, employers may pay a claim-based “employer excess” as a deductible.  The specifics vary but generally employers are financially responsible for the first five or ten days of work-related losses and related medical expenses. [see SafeWork Australia, Comparison of Workers’ Compensation Arrangements in Australia and New Zealand 2021 (28th Edition), Table 3.9 available at https://www.safeworkaustralia.gov.au/book/comparison-workers-compensation-arrangements-australia-and-new-zealand-2021-28th-edition/chapter-3-schemes-glance/table-39-employer-excess ]

Self-insurance represents a significant aspect of workers’ compensation coverage, accounting for the following proportions of workers’ compensation benefits paid in the US in 2020 [see Workers’ Compensation: Benefits, Costs, and Coverage (2020 data), Table 7 available at https://www.nasi.org/research/workers-compensation/workers-compensation-benefits-costs-and-coverage/ ]:

• Employer-paid deductibles (a form of self-insurance):  17.5%
• Self Insured : 24.7%
• Federal (government self-insurance): 5.5%

These three categories  of self-insurance alone account for nearly half the workers’ compensation benefits paid in the US.

The prevalence of the self-insurance model has seemingly increased over recent decades, although its impact on worker outcomes remains unclear.  That’s a topic for another day.

Self Insurance and Workers' Compensation

I read the following headline recently: "North Dakota Weighs Letting Firms Self-Insure for Workers' Compensation" (see Insurance Journal, Midwest News, January 20, 2009). The article briefly outlined an initiative that would allow self insurance and alluded to various other states that are monopoly providers of workers' compensation coverage. Unfortunately, the article does not define self insurance or the various forms of workers' comp insurance arrangements.


A self-insured firm in a workers' compensation context, is one that carries the risk of work-related injury, illness and disease to its employees without pooling or sharing that risk with other employers. For individual firms with enough employees and a stable injury rate, the risk can be quantifiable and, over time, the costs can be predictable.


Self insurance can be with or without self administration. Self-administered firms come in a range of 'flavours' along a continuum between the following extremes:

• all aspects of claims management and rehabilitation handled internally for their own employees
• all (or almost all) of the administration contracted out to a third party.

Self insurance without Self administration usually leaves the adjudication and administration of claims to the state agency with the firm carrying the costs of injuries and paying for the administration. WorkSafeBC, for example, has Deposit Class employers who are essentially self insured but the claims from these employers are handled just as they would be for all other insured employers by WorkSafeBC.


It makes little sense for small or medium sized firms to self insure. Work-related injuries are relatively rare and serious injuries with high costs are thankfully even rarer. Unfortunately, one rare but costly work-related injury could bankrupt a small firm. As with other risks of rare events (fire, flood, third party liability), it makes sense for most firms to be insured. And since administering workers' compensation claims is not the core business of most firms, self insurance is rarely considered even where it is offered.


Allowing self insurance where it does not exist or expanding it can create a lot of additional and unanticipated costs. There are monitoring costs by the insurance regulator, the question of appeals or dispute resolution and the assurance, bond or other security the self-insured firm normally has to post with the state to guarantee payments should the firm be unable to do so. This last point was unthinkable a few years ago but the viability of once blue-chip firms is a painfully real issue in light of the current economic crisis.

Allowing or expanding self insurance has other consequences for the remaining insured parties or the state. On what basis should the costs of workers' compensation research, oversight and appeals be shared by self-insured firms? Removing firms from existing pools will also have an effect on the remaining firms in the pool. Credibility from an actuarial point of view may be lost and wider swings in premium rates are more likely if the largest firms in a rate group are removed to become self insured.


The article also points out that North Dakota is one of only four exclusive state funds in the US. It should be noted that exclusive state funds are the norm in Canada where each province has made its workers' compensation agency the sole provider of workers' compensation insurance. In a sense, the federal government in the US is also an exclusive state fund providing the insurance administration for federal government departments. (And in some sense, the federal government departments are like self-insured firms contracting with the exclusive insurer for administration).


A few years ago, Best Practices LLP produced a report entitled "Excellence in Workers' Compensation Program Administration". It focuses on very large self insured organizations and how they structure the administration of their programs. Interestingly, the costs for administration vary widely in the surveyed population. More importantly, the costs of the best performing firms appear similar to or higher than those of several exclusive state funds in Canada and the US.


Self insurance with Self Administration may make sense particularly for very large multinational firms if there are no other alternatives. That said, many such firms already operate in states, provinces or countries that do not allow self insurance so the insurance arrangement is not a barrier to locating operations in a particular market.

Self insurance without Self Administration has its place but it also has costs and risks. Any jurisdiction considering introducing or expanding the number of self insured firms in its jurisdiction needs to be aware of these.