Introducing Self-Insurance
Today, thousands of companies across the United States are benefiting from an alternative way of buying insurance to protect their businesses and their employees. The process is known as Self-Insurance and if it is right for your business the potential benefits can include:
- Lower insurance premiums
- Better Insurance Coverage
- More Reliable Insurance
- A Safer Workplace
- An improved bottom line
SpecandAgg.com looks at the most common forms of self-insurance in use today, it explains how self-insurance works and what the potential benefits to a company can be.
It provides information designed to enable you to discuss your company's insurance needs with service providers with a basic knowledge of self-insurance, as well as helping you decide whether your company might benefit from becoming self-insured.
But first, what is Self-Insurance?
1.The Concept of Self-Insurance
Self-Insurance is defined as when a company, or group of companies, pays part of its own insurance losses and also assumes the role of an insurer by establishing systems to pay those claims.
Self-insurance is a widely recognised way for a company to buy insurance. It can allow companies to design their own insurance programs, get wider insurance coverage, make factories and offices safer places to work in and save them money.
With self-insurance a company identifies certain loss exposures and then makes the decision to assume the role of an insurance company by becoming responsible for settling all or part of the claims arising from those risks.
By assuming the role of an insurer, self-insurance can allow a company to design its own insurance program, making insurance coverage more available than would otherwise often be possible in the commercial market. It provides a company with an incentive to reduce its claims, save premiums and consequently increase its profits.
Self-Insurance differs from standard insurance policies that have large deductibles as it requires the self-insurer to adopt a formal system of paying for its losses. As a result of being more aware of the potential losses, as well as the savings, self-insurers need to adopt a more hands-on role with regard to loss prevention than they would if they were insured in the traditional markets.
Today many companies in the United States are applying these principles to their own insurance programs and benefiting accordingly through the process known as self-insurance.
2. The Principles of Self-Insurance
(i) Retention of Losses
A basic concept of Self-Insurance is that if you are a self-insurer, you will have a greater interest in ensuring that losses are kept as low as possible. Claims savings are passed back to the self-insurer rather than a conventional insurer, either as a reduced premium or a dividend.
(ii) Assuming the Role of an Insurer
By replacing the role of an insurance company and becoming responsible for claims payments), self-insurers are not only able to pay claims more quickly but they can also monitor where losses are coming from which enables them to make loss control improvements to their workplaces accordingly.
Self-insurance normally requires a company to set aside funds to pay these losses as well as purchasing high-level excess policies to ensure that the monies set aside will not be exceeded by higher than expected claims. Budgets for insurance can be set in the knowledge that monies set aside for insurance are the maximum amount that the self-insurer will have to spend and if claims costs are less than expected the company will save money and increase its profits.
(iii) Availability of Insurance Coverage
Self-Insurance can allow a company to obtain insurance coverage that would otherwise be unavailable in the commercial insurance market. As a self-insurer pays its own claims, policies can be tailored to its own needs with less impact from changes in the traditional insurance market.
3. Insurance Risks that can be Self-Insured
Today insurance in the U.S. is regulated by individual state insurance departments. Each State requires insurance companies to be licensed to transact business in the State and to file policies and rates stipulating on what basis coverage is provided.
Whereas most classes of business can be self-insured in some form, for certain classes of insurance such as automobile liability, general liability and workers compensation many states regulate the companies that elect to self-insure. These laws are designed to protect an injured party in order that they can be assured of having their claims met in the absence of traditional insurance cover.
Employee benefits represents the largest self-insured class due to the high premium charges associated with the cost of healthcare however for this class of business self-insurance, or self-funding as it is sometimes called, is permissible under a federal law known as ERISA which pre-empts individual state laws.
Some States allow individual companies and groups the ability to establish virtual insurance companies which can either be risk retention groups or captive insurance companies. These entities serve the purpose of either enabling small companies to band together to obtain difficult to purchase type coverage or, for the more sophisticated and larger companies, the chance to establish separate companies as new profit centres.
