The Different Ways A Business Can Obtain Workers' Compensation Coverage
Let’s be honest: when most people think about workers’ compensation insurance, they assume it’s just another fixed business expense—something you buy, set, and forget. But the truth is, there’s more than one way to get coverage, and the option you choose can make a big difference to your bottom line.
Depending on your company’s size, industry, financial setup, and even where you’re located, there are multiple paths to protecting your team and staying compliant. From traditional state-run programs to private insurance carriers, self-funding, group captives, and even outsourced HR models like PEOs and ASOs, each route comes with its own pros, cons, and ideal use cases.
In this blog, we’ll break down the five main ways employers can buy workers’ compensation insurance—and why the “default” option might not be the smartest one for your business. Whether you’re a startup with a lean team or an established operation exploring cost-saving strategies, understanding your options is the first step toward building a smarter, more efficient approach to coverage.
1. State-Run Workers’ Compensation Programs
First up: state-run programs. In a few states, like North Dakota, Washington, and Wyoming, businesses literally have to buy workers' compensation through the state. No exceptions. These are called monopolistic states, which sounds kind of evil, but it just means there's no private market.
In other states, you’ve got competitive state funds, which are kind of like a public option. You can buy through them, but you’re not required to—they compete with private insurers.
Pros:
For small businesses or those in high-risk industries, these programs can sometimes offer more affordable premiums compared to private carriers. They’re also relatively easy to access, especially if your company doesn't have the resources to shop around or negotiate with private insurers. On top of that, pricing tends to be more predictable, which can help with budgeting and planning.
Cons:
That said, these programs can be pretty rigid. You won’t get much room to negotiate terms or customize your coverage. Customer service and claims processing can also feel impersonal or slow, which is frustrating when you're dealing with an injured employee and need quick answers.
Want to see how a state-run program actually works? Check out this blog on Ohio’s workers’ compensation system for a real-world example.
2. Private Insurance Carriers
This is the most common route, and probably what most businesses are already using. It works a lot like shopping for auto or home insurance. Businesses get quotes from different private carriers, compare options, and pick the one that fits their needs and budget best.
But just because it’s common doesn’t mean it’s basic. Going through a private insurance company gives you way more room to dial in a policy that actually works for the business, not just some cookie-cutter coverage.
Why go private?
Private carriers offer a level of flexibility that’s hard to match. Businesses can shop around, compare multiple providers, and customize a policy that’s tailored to their actual needs—not just a generic industry profile.
They also tend to reward companies with good track records. If you’ve got a solid safety program and low claims history, you’re likely to receive competitive rates and potential discounts that wouldn’t be available through a government fund.
Another big perk? Customer service. Private carriers usually provide faster, more personalized support. If there’s an issue or a claim, you're not stuck navigating a faceless bureaucracy—you’ve got someone to call who knows your account.
And when it comes to specialized coverage, private insurers shine. Whether you run a food truck, a construction business, or a healthcare clinic, there's likely a policy built with your specific risks in mind.
Best for:
Businesses that want more control over their policy and claims handling, better customer support, and access to coverage that fits their unique risk profile. This route is especially valuable for high-risk industries like construction, manufacturing, or hospitality where general coverage just won’t cut it.
3. Self-Funded Workers’ Compensation
Self-funded workers’ compensation, also known as self-insurance, is basically saying, “We’ve got this.” Instead of paying monthly premiums to an insurance company, a company will take on the financial risk. That means if an employee gets hurt, the medical bills and lost wages come straight out of its own pocket.
Sound intense? That’s because it kind of is. But for companies that are big enough and have their house in order, it can be a smart move.
Here’s what a business needs to even be in the game:
First, you need serious financial backing. We're talking about having enough cash reserves to cover the worst-case scenarios, because even one serious claim can cost tens or hundreds of thousands of dollars.
Second, you need a clean safety track record. Regulators and governing bodies won’t approve self-insurance unless they can see that your company takes workplace safety seriously and has a history to prove it.
Third, you’ll need regulatory approval from your state. Requirements vary depending on where you operate, but generally, your company will need to meet stringent financial, administrative, and procedural criteria.
Lastly, a good TPA (Third-Party Administrator) is essential. They’ll handle everything from claims processing to compliance paperwork, making sure you stay in line with the law while managing each case efficiently.
Why would anyone do this?
Because for large, well-run companies with strong safety records, self-funding can be far more cost-effective in the long run. You’re not paying premiums to an insurer year after year—you’re investing in your own ability to manage claims and take full control over the process. And when you handle claims well, you reap the financial benefits directly.
But here’s the catch:
There’s no backup plan. If something goes wrong—a serious accident or multiple claims close together—the company is responsible for the full cost. So it’s not for the faint of heart. But when executed properly, it offers big savings and unmatched transparency.
Best for:
Large, financially stable companies with dedicated HR, safety, and legal teams. Think Fortune 500 firms, nationwide franchises, or heavy-hitters in construction and logistics with deep pockets and solid operations.
4. Group Captive Programs
Captives are kind of like a shared-risk pool. A bunch of like-minded businesses join together, form their own insurance group, and collectively take on risk.
Think of it like:
A co-op model for insurance. Every member still takes on some risk, but it’s spread out across the group. Everyone contributes, everyone shares in the risk—and if the group performs well (i.e., keeps claims low), everyone also shares in the rewards, including potential profit distributions.
Pros:
Group captives offer far more control over your insurance experience than buying off-the-shelf policies. Since the group collectively manages the program, decisions are made by business owners, not external insurers.
You also gain access to profit-sharing if claims stay low—something you’d never see in a traditional plan. And since everyone’s financially invested, there’s often a stronger culture of safety and accountability.
Cons:
Joining a captive requires commitment. You’ll need to be in it for the long haul, and upfront costs—like feasibility studies and audits—can be steep.
Also, because the group’s success depends on everyone pulling their weight, not just anyone can join. Each member needs to be vetted to ensure their operations and safety standards won’t jeopardize the pool.
5. Outsourced HR Partners: PEOs, ASOs, and AEOs
These acronyms sound fancy, but they basically represent different levels of “Let someone else handle this.”
Here’s the quick breakdown:
A PEO (Professional Employer Organization) enters into a co-employment relationship with your company. That means they become the employer of record for certain legal purposes, giving you access to their workers’ compensation master policy—plus HR services, payroll processing, and benefits administration.
An ASO (Administrative Services Organization) gives you many of the same back-office services, but without the co-employment structure. Your company keeps the policy in its name, but the ASO handles the day-to-day management of workers’ comp, payroll, and compliance.
An AEO (Alternative Employer Organization) blends elements of both. It gives you some of the risk-sharing advantages of a PEO but with more operational flexibility, especially in states that regulate co-employment closely.
Why do this?
Because for many companies, these options take a huge administrative load off your plate. They simplify compliance, reduce internal HR headaches, and give you access to group-rated insurance programs that might otherwise be out of reach. They also should help you proactively manage claims ensuring all aspects of claims management optimization are being taken advantage of including identifying fraud, optimizing return-to-work programs and ensuring all administrative responsibilities are fulfilled.
Plus, many outsourced partners offer safety training, claims management, and other support services that can help reduce overall workers’ comp costs.
Not sure whether an ASO or PEO makes more sense for your business? Check out our ASO vs. PEO blog where we break down the key differences and help you figure out which model fits best.
Final Thoughts
At the end of the day, the right workers’ comp strategy depends on a few key things:
- How big your company is
- What kind of risks your employees face
- What kind of control you want
- Where you’re located
Trying to figure all this out on your own can be a headache, and making the wrong call could cost you.
That’s where we come in. Alloy Employer Services helps businesses figure out the smartest and most cost-effective way to stay compliant. Whether you’re just getting started or thinking about switching models, we’re happy to talk through your options.
Contact us today for a free consultation and let’s find the model that works best for your business.
