DATE:  November 5, 2002

TO:  Montana Board of Regents of Higher Education

FROM:  Rod Sundsted, Associate Commissioner for Fiscal Affairs

SUBJECT:  Workers' Compensation

The enclosed documents are being provided in response to the board's request for information regarding self-insurance as an option for providing workers'compensation insurance for employees of the Montana University System.

I have enclosed two documents. The first is a letter from Jeff Lapham of the Self-Insurance Unit of the Employment Relations Division of the Department of Labor and Industry. This letter indicates that the MUS has met all the actuarial requirements for self-insurance. The letter also states that the department will not accept funding at the "expected scenario" and strongly recommends a funding level that is between the "75% confidence level" and the "90% confidence level". This level of funding is recommended because the MUS would need to build reserves over time because of the increased risk exposure associated with self-insurance.

The second document is an "Evaluation of Self-Insurance Option for Workers' Compensation Exposures" that was prepared by Millman USA for the Montana University System. This document is the actuarial report referenced in the letter from Jeff Lapham.

The current rates in our contract with the Montana State Fund will result in an estimated premium of $1,743,261 for FY03 for all units of the Montana University System. The actuarial report identified needed funding for the same period of $1,720,000 for the "Expected Scenario", $1,870,000 for the "75% Scenario", and $2,040,000 for the "90% Scenario". Because we would need to fund the self-insurance program at a level between the 75% and 90% scenarios, the rates we would charge ourselves under self-insurance would actually be higher than the fully insured rates, at least during the time when we would be building reserves to cover the increased exposure. In addition, our risk exposure would be significantly increased as the actuarial report assumed no aggregate reinsurance and individual reinsurance at the level of $500,000 per occurrence. While I believe most of the MUS staff responsible for safety and risk management think self-insurance is the best long-term option for controlling costs, there are clearly additional short-term costs. In addition, any long-term savings would not accrue automatically as a result of self-insurance. They would have to be generated through increased effectiveness of safety, early return to work, ergonomics, and educational and training programs that would result in reduced claims.