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Self-insurance and third-party administrators (TPAs) explained
What self-insuring means for workers' comp, liability and health, what regulators and excess carriers require, and what a TPA does and should be asked.
Self-insurance means you pay your own claims from your own funds instead of buying a policy that transfers them to an insurer. A third-party administrator (TPA) is the outside company that adjusts the claims, keeps the records and handles the paperwork, because most employers that retain risk do not want to staff a claims department. Self-insurance is rarely all-or-nothing: employers keep a layer and buy excess or stop-loss coverage above it, and the TPA runs the layer they keep.
What "self-insured" means in each line
The term covers different arrangements depending on the coverage, and the regulator changes with it.
| Line | How self-insurance works | Who oversees it |
|---|---|---|
| Workers' compensation | The employer applies for a state certificate or authority to pay comp claims itself, posts security and buys excess insurance | The state workers' comp agency or insurance department |
| Auto liability | A certificate of self-insurance where the state allows it; interstate motor carriers can apply to FMCSA for self-insurance authorization under 49 CFR 387.7(d) | State motor vehicle agency; FMCSA |
| General and professional liability | A self-insured retention or a captive layer under an excess policy | The contract; the excess insurer |
| Employee health | A self-funded health plan: the employer pays claims and buys stop-loss | Federal ERISA law, with the Department of Labor |
| Property | A large deductible, which is self-insurance of the first loss | The policy |
A deductible and a self-insured retention are close cousins; the difference is who pays first and who controls the claim. See deductibles vs self-insured retentions: who pays first. A large deductible program in comp is self-insurance bought through an insurer's paper, covered in large deductible workers' comp programs: how they work and what they cost.
What a regulator wants before it lets you self-insure
Workers' compensation is where the entry test is most formal, because an injured worker's benefits cannot depend on an employer's balance sheet staying healthy. Every state that permits individual self-insurance sets its own rules, so this is a sample, not a national rule. See workers' comp requirements by state: who must carry it and self-insuring workers' comp: requirements and trade-offs for the full picture.
- New York. The Workers' Compensation Board requires tangible net worth above seven times the greater of the three-year average gross claims payments or the annual premium paid. Its minimum security deposit is $1,999,000, effective July 1, 2026, with the initial amount set from the application and reviewed annually. The employer must maintain a safety program and file a certificate of excess insurance after conditional approval.
- Nevada. Under NRS 616B.300, the Division of Insurance requires tangible net worth of at least $2,500,000, a security deposit based on claims history with a minimum of $100,000, evidence of excess insurance against catastrophic loss, and a named claims administrator in the application.
Four states (North Dakota, Ohio, Washington and Wyoming) run exclusive state funds, so any self-insurance there is set up through the state itself; Washington's Department of Labor and Industries, for example, administers it. See Monopolistic state funds: workers' comp in ND, OH, WA and WY.
The common thread is financial strength, collateral, an excess policy and a plan for who will handle the claims. Applications usually have to name the claims administrator.
Excess and stop-loss coverage
Self-insured employers almost always buy coverage above their layer. In comp it is excess workers' compensation with a specific per-claim retention and sometimes an aggregate. In health it is stop-loss insurance, covered in stop-loss insurance for self-funded health plans: specific, aggregate and the fine print. Three details make or break a claim:
- Notice. Excess policies require prompt notice of claims likely to reach the layer. A TPA that does not flag a claim at reserve thresholds can cost the employer coverage.
- Who decides reserves and settlements. The excess insurer usually has consent rights above its attachment point.
- Matching terms. Policy periods, definitions of covered claims and the reporting dates for the excess policy should line up with how your TPA reports.
What a TPA does
A TPA is a company that administers claims or benefits on behalf of a payor, which may be an insurer, a self-insured employer or a plan. Typical services:
- Receiving first reports of injury, loss or claim and setting up files.
- Investigating and adjusting claims, setting reserves and paying within authority limits.
- Managed care and bill review in comp and health.
- Reporting to the state workers' comp agency, the excess insurer and the employer, including regular loss run reports.
- Funding and reconciling a claims account, where the employer deposits money and the TPA pays claims from it.
- For health plans, enrollment, claims payment, appeals and member service.
The NAIC publishes a guideline on this, GL-1090, "Registration and Regulation of Third Party Administrators." It is a model for states, not binding by itself, and it reflects how most state laws treat TPAs. Its Version 1 covers workers' compensation and stop-loss as well as life and health. Provisions that matter to a buyer include a written agreement between the TPA and the payor, books and records kept for at least five years, premium or collateral paid to the TPA being treated as received by the insurer, and disclosure of the TPA's charges and fees. Version 1 also bars a TPA from agreeing to let the employer adjust its own comp claims, and an employer cannot get around that by licensing an affiliate as a TPA. State laws differ on who must be licensed and how, so confirm the TPA's license in your state with its insurance department.
Self-funded health plans and ERISA
Health is the largest self-insurance market for employers. KFF's 2025 Employer Health Benefits Survey found that 67 percent of covered workers are in a self-funded plan; 80 percent of workers in firms with 200 or more workers are in one, against 27 percent in smaller firms. A self-funded plan is governed by federal ERISA law, and the Supreme Court held in FMC Corp. v. Holliday, 498 U.S. 52 (1990), that state insurance regulation does not reach it. That means a self-funded employer may escape state-mandated benefits, but the plan still carries federal duties; see ERISA basics for small employers: what the law requires of your benefit plans.
For these plans the TPA is often called an administrative-services-only (ASO) vendor, and an insurer can play that role as well. The employer, as plan sponsor, remains a fiduciary and cannot hand responsibility to the TPA by contract alone. Stop-loss, a medical cost cap, and the fully insured option are compared in fully insured vs self-funded health plans: which fits your business.
A hypothetical comparison
Say a 250-employee manufacturer in Indiana pays a commercial insurer a guaranteed-cost premium of $900,000 a year for general liability, auto and property deductibles it could fund. Over seven years its claims inside a $100,000 per-occurrence layer have averaged $310,000 a year. The company moves to a $100,000 self-insured retention with a TPA at a fixed annual fee. The TPA charges $48,000 to adjust and report. The employer sets aside a claims fund of $350,000 and buys excess coverage above $100,000.
In a typical year, the employer saves the insurer's expense and margin on the layer it retains, less the TPA fee. In a bad year with $700,000 of claims inside the retention, the employer pays the extra from the claims fund and its operating cash, and must plan for that. These figures are invented to illustrate the mechanism, not to suggest a typical saving. The deductible and retention break-even calculator helps test your own break-even.
Choosing and managing a TPA
- Check the license and complaint history with your state insurance department.
- Ask for the claims-authority schedule. Who can settle what without your approval, and what are the thresholds for reserves and excess notice?
- Get the fee structure in writing: flat fee, per-claim fee, percentage of paid claims. Each structure creates different incentives, so ask how the TPA is paid when a file stays open for years.
- Ask who owns the data and in what format you get it if you change TPAs.
- Request an independent claims audit annually, with a sample of open claims.
- Match the TPA to the line. A comp TPA with nurse case managers is not automatically a good liability adjuster.
- Ask about conflicts. Does the TPA also sell insurance, stop-loss or managed care it may steer you to?
Key takeaways
- Self-insurance is a retained layer, usually capped by excess or stop-loss coverage; very few employers retain everything.
- For workers' comp, you need regulator approval, security and excess insurance, and the tests vary by state: New York's minimum deposit is $1,999,000 from July 1, 2026, and Nevada requires $2.5 million of tangible net worth.
- A TPA handles claims, reports and paperwork, but the employer remains responsible for the funding and, in a health plan, the fiduciary duties.
- KFF's 2025 survey shows 67 percent of covered workers in self-funded health plans, and ERISA keeps those plans out of state insurance law.
- Check the TPA's license, authority limits, fees, data ownership and excess-notice discipline before you sign.