Reference no: EM132762447

Established in 1850, Taunton College is a private, not-for-profit college in a mediumsized metropolitan area. Taunton College attracts a very high-quality student body because of its world-renowned faculty, who are acknowledged experts in their respective fields. Two thousand undergraduate students and 500 full-time graduate students attend Taunton. Annual tuition averages $50,000 but the college grants significant tuition reductions through scholarships to deserving students. A $700 million endowment funds a large part of the college's expenses. Taunton's tuition and fees grew faster than comparable institutions over the last five years. In response, the President of the college asked the administration to look at ways to cut the operating expenses. Among the many initiatives proposed, he asked Taunton's Risk Manager to assess a self-insurance plan for its Workers Compensation program. Taunton employs 800 people in three main job categories. Three hundred work as faculty members, about one-third of who are part-time. Three hundred people work desk jobs in administrative services, mainly clerical workers and IT staff. Two hundred technical service workers work as police officers, nurses, groundskeepers, electricians, and carpenters. Recently Taunton's built a state-of-the-art fitness center and strongly encourages its use by employees. Taunton grants employees time off during their normal workday to attend wellness classes, exercise programs, and organized intramural sports. The facility operates from 6:00 a.m. to midnight, seven days a week. Most employees take advantage of the services. As a result, Taunton College management believes that its employees are healthier than the average population.

Part One - Self-Insurance State law allows organizations like Taunton to self-insure their workers compensation exposure. State law also requires that if an organization wants to self-insure worker's compensation, the organization must also maintain excess liability insurance for any claim over $100,000. The state assesses taxes and fees based a fixed percentage of paid claims. Taunton plans to outsource its administrative functions to a third-party administrator.

Problem 1: Advantages and Disadvantages of Self-Insurance for Taunton As the first step in the analysis, the Risk Manager asks you to:

(A) Identify the advantages and disadvantages of self-insurance and write brief descriptions how each applies to Taunton College.

(B) Overall, do the costs of self-insurance out-weigh the benefits for Taunton College, or vice-versa? Why?