What is Self-Insurance?

Self-Insurance can be defined as when a company or a group of companies pays all or part of its own insurance losses and assumes the role of an insurer by implementing systems to pay those claims. 

Sometimes referred to as ‘alternative risk transfer’, Self-Insurance can enable a company or group of companies to design its own insurance program. This means that they can often obtain broader or more appropriate insurance coverage than would otherwise be available commercially. Self-Insurance also creates an incentive to make factories and offices safer places to work and, if managed properly, can reduce insurance premiums. 

With Self-Insurance, a company or a group identifies its loss exposures and then makes the decision to assume the role of an insurance company by becoming responsible for settling all, or part, of any claims arising from those risks. By becoming its own insurer, a self-insured company or group can modify or design its insurance program, making insurance coverage more available than might otherwise be possible in the traditional commercial insurance market.

Self-Insurance differs from standard insurance policies that have large deductibles, as it requires the self-insurer to adopt a formal system for paying its losses. This function is often outsourced to a claims manager, such as a third party administrator. 

Self-insurers need an increased awareness of potential losses as well as savings, and as a result have a responsibility to adopt a more hands-on role with regard to loss prevention than if they were insured in the traditional commercial insurance market. Self-Insurance therefore provides an incentive to reduce claims, save premiums and consequently increase profits or cash flow. 

The Principal Features of Self-Insurance

There are several key features that distinguish Self-Insurance from traditional risk transfer programs: 

1. Creating an insurable interest

When a company becomes Self-Insured, it will have a greater interest and incentive to ensure that losses are kept as low as possible. The reason for this is that any claims savings directly benefit the Self-Insured company rather than a traditional insurer.

2. Assuming the role of an insurer

Self-Insurance requires the creation of formal procedures for processing and payment of claims. These functions are often performed through an outside service provider such as a third party administrator or program manager. 

By assuming the role of an insurance company and becoming responsible for claims payments, a self-insured company is not only able to pay claims more quickly, but it can also monitor the source of losses. This enables the company to make appropriate loss control and safety improvements to its premises. 

Self-Insurance also requires that procedures are set up to monitor the financial performance of the program. These play an important role because negative trends can be identified and dealt with before they deteriorate. Often new loss control procedures are established by a self-insurer to reduce the possibility of losses, or to manage them after they have occurred.

3. The 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 their own claims, policies can often be tailored to their unique needs without impact from any changes in the traditional insurance market. 

4. Risk transfer for large losses

Self-Insurance normally requires a company to set aside funds to pay losses, often referred to as a loss-fund, and also to purchase high-level excess policies or reinsurance policies to ensure that the loss fund is protected from higher than expected claims. When properly constructed, budgets can be set in the knowledge that monies set aside for insurance are the maximum amount that the Self-Insured company will be liable for. If claims costs are less than expected, the company will save money and increase its profits.

Also in this section

Making the Decision to Self-Insure
The Advantages and Disadvantages of Self-Insurance
Limiting Risk through the Self-Insured Retention