Making the Decision to Self-Insure

Prior to taking the decision to self-insure, there are specific areas that need to be addressed in order to ensure that self-insurance is a viable proposition.

(i) The size of the portfolio

A company considering self-insurance must be satisfied that the size of the portfolio to be self-insured is large enough to warrant the costs incurred. As a new self-insurer a company will face legal and accountancy charges to ensure that it is compliant with State insurance legislation.

There will also be costs arising from other areas such as setting up loss control systems and also purchasing excess insurance, both of which can require an up-front cost. A generally accepted rule is that a single company self-insured portfolio should generate in the region of a minimum of $750,000 to $1,000,000 of normal premium to make it economic to self-insure.

(ii) The nature of the portfolio to be self-insured

Self-Insurance is especially well suited to two types of business which are as follows: a) Business with predictable loss patterns. On portfolios where losses are frequent and normally of the same size, commercial insurers can calculate and charge premiums with a degree of certainty. Self-insurance allows a company to avoid what is known as "dollar-swapping". As the commercial insurer will always need to load premiums for administration and profit a self-insurer can achieve savings by paying these losses itsself and avoid any loadings. b) Business which is long tail in nature. Self-insurers can also benefit from self-insuring portfolios where the claims are not paid for a number of years as monies set aside to pay claims can be diverted to other parts of a company's operations.

(iii) The availability and cost of excess insurance

Specific and aggregate coverage plays a key role in determining the feasibility of self-insurance. Pricing of this coverage will be calculated according to market conditions, the level of the self-insured retention and the anticipated losses.

(iv) The company's appetite for risk

Although specific and aggregate insurance provides a self-insured with a degree of certainty with regard to the financial risk that it faces, a company will normally have a potential higher maximum cost than had it remained fully-insured. The specific and aggregate coverage will therefore need to be negotiated by the self-insured's insurance broker or administrator to ensure that the self-insured retention and maximum potential loss do not expose the company to any unacceptable financial risk.

(v) The company's long-term objective

Self-insuring requires a long-term commitment, as it can be expensive to change once a plan is established. Not only will a company incur some cost, both in management time and expense, from initiating a self-insured plan but in addition the benefits of self-insurance are often only properly realised after a period of time. The reason for this is that cost control and loss prevention techniques can take time to come into effect and also relationships with excess insurers can take time to come into effect as a level of comfort by insurers can only be generated over a period of time. If a company is committed to enhancing its bottom line and improving its loss and safety record through proper monitoring and action it is probably an ideal candidate for self-insurance. If it is purely seeking a short-term monetary gain it is probably not.