Why would a large employer prefer to self-fund employee benefits?

Why would a large employer prefer to self-fund employee benefits?

• A. To reduce overall benefit levels
• B. To avoid paying premiums to an insurer to transfer the risk and costs
• C. To bear the risk and costs directly
• D. To meet regulatory incentives

Answer: (C)

Self-funding means the employer pays for benefits out of its own funds as claims are incurred, rather than paying a fixed premium to an insurer who assumes the financial risk. For a large employer, this approach can be appealing because it gives direct control over plan design, administration, and cash flow. If claim costs come in lower than expected, the employer can realize those savings, and any investment income on the funded reserves is retained by the employer. The major trade-off is bearing the risk of higher-than-expected claims, which is why many self-funded programs pair with stop-loss coverage to cap downside exposure. In short, self-funding is about bearing the risk and costs directly, with potential cost control and design advantages when the employer has enough scale and capability to manage claims and reserves.

Self-funding means the employer pays for benefits out of its own funds as claims are incurred, rather than paying a fixed premium to an insurer who assumes the financial risk. For a large employer, this approach can be appealing because it gives direct control over plan design, administration, and cash flow. If claim costs come in lower than expected, the employer can realize those savings, and any investment income on the funded reserves is retained by the employer. The major trade-off is bearing the risk of higher-than-expected claims, which is why many self-funded programs pair with stop-loss coverage to cap downside exposure. In short, self-funding is about bearing the risk and costs directly, with potential cost control and design advantages when the employer has enough scale and capability to manage claims and reserves.