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As workers’ compensation insurance rates soar in step with medical and health-care costs, many small to moderately sized restaurant companies are self-insuring rather than paying the market’s exorbitant premium hikes.

Once the exclusive preserve of billion-dollar companies with multimillion-dollar payrolls, self-insurance increasingly is becoming an option for substantially reducing — if not eliminating — the high premium costs of workers’ comp for scores of companies.

Whether it’s a growing national chain like Papa John’s International with tens of thousands of workers, a more regionally concentrated brand like Englewood, Colo.-based Red Robin or an upscale operator like fine-dining chef-entrepreneur Jean George Vongerichten in Manhattan, a diverse array of operators are saving money by becoming self-insured.
Experts say the trend comes at a time when the cost of policies for workers’ compensation — required by law in most states to be renewed annually — have been skyrocketing for the past year and a half.

Even for operators with low claims experience and successful employee safety and training programs, double-digit percentage hikes in premium rates, sometimes as high as 50 percent, are not unheard of, according to brokers.

Although the Sept. 11, 2001, terrorist attacks — which generated from $2 billion to $3 billion in workers’ comp death-claim benefits — are one reason premiums are climbing, of greater consequence are the insurance companies’ vanishing investment incomes generated by the low premium dollars collected in the mid-1990s.
In addition, steadily ballooning medical and health-care costs, which were rising long before 9/11, have forced insurers to jack up rates to restore their reserve funds and counter a bearish stock market.

“Insurance companies have got to pay and honor their claims,” says Carolyn Gorman, a spokeswoman for the Insurance Information Institute. “But as much as people may have a hard time believing it, insurance companies live in the same economic marketplace as all of us.

“When the stock market is doing well, they use their premium dollars to invest and use the capital accumulation from those investments to pay claims,” she continues. “When the stock market does poorly and investments do poorly, they have to increase rates to bring in capital. That is the business cycle we find ourselves in currently.”

The III is an independent, Washington, D.C.-based research firm that provides statistical reports and analyses on insurance trends for government and private industry.

Gorman also notes that although there are those who like to discount the impact of 9/11 as some short-term aberration on insurance costs, insurers will be paying claims related to the attacks “for decades to come.”

Tom Thompson, vice president of risk management for Papa John’s and an active member of the National Restaurant Association’s Safety, Security and Risk Management Group, says being self-insured gives a company more control over its destiny.

“In order for us as an employer to be able to mitigate but not insulate ourselves from insurance costs, we entered what is coming to be called the ‘alternative-insurance marketplace’ with workers’ compensation,” Thompson explains. “In essence, we’re self-insured. It’s like going from the backseat of the car to the driver’s seat.

“What it means,” he continues, “is we are responsible for covering a far larger piece of the exposure internally. But on the other hand, the amount of fixed premium costs has gone down substantially, and whatever we do internally to create a measurable loss-control program improves our cost structure even more.”

Broadly speaking, the way self-insurance works at Papa John’s and other companies, brokers and risk managers explain, is that the business owner takes on all the duties of an insurance company up to a certain point and the insurer becomes akin to a reinsurer.

Although self-insurance is practiced in varying permutations across the country, the general principle goes like this: The operator absorbs the financial exposure and pays out claims on hospital-recorded employee accidents and injuries up to a certain maximum annual figure or aggregate.

Like a deductible on medical- or car-insurance policies that consumers pay before their insurers pay off the balance of the claim, the higher the annual aggregate amount of loss, or exposure, companies are willing to assume, the lower their insurance costs.

In some configurations self-insurance is “extra insurance operators buy above a certain amount of deductible.

In yet other permutations a percentage of the average medical cost related to a specific injury is paid until a grand total is breached that ushers in an insurer.

Operators and brokers say self-insurance yields its best results when companies succeed in driving down their claims experience during the year before signing up. That usually is accomplished through safety programs, better training and linking a percentage of the restaurant manager’s annual bonus to the unit’s claims history.