Considerations for becoming Self-insured
1. Size of the Portfolio
A company or group considering Self-Insurance must be satisfied that the size of the portfolio to be Self-Insured is large enough to warrant the costs incurred. These costs can include: establishing a loss fund, setting up claims administration and loss control systems, paying legal expenses, as well as the initial cost of purchasing excess insurance or reinsurance.
2. Size of the Organization
Self-Insurance not only requires financial investment but also an allocation of management time. If these resources are too precious due to a company’s size, Self-Insurance should probably not be considered.
3. Legal Considerations
The company or group will need to ensure that it is compliant with relevant insurance legislation. For example, Workers’ compensation in the USA is subject to statutory coverage regulation and cannot be amended in any state except where legislation permits.
4. Nature of the class of business that you wish to self-insure
Self-Insurance is especially well-suited to businesses 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. As the commercial insurer will always need to load premiums for administration and underwriting margin, a Self- Insurer can achieve savings by paying its own losses, effectively avoiding such loadings.
5. Availability and cost of Excess Insurance or Reinsurance
Excess, specific and aggregate stop-loss or reinsurance coverage plays a key role in determining the feasibility of Self-Insurance as it protects the Self-Insurer from an unexpectedly large or a series of unexpected claims. Pricing of the appropriate coverage will be calculated according to market conditions, the level of the Self-Insured retention as well as the past and future anticipated claims experience.
The pricing of the excess, specific and aggregate stop-loss or reinsurance cover is fundamental to small to medium-sized companies that are dependent on such cover to limit their financial risks. If the pricing is greater than anticipated, the viability of Self-Insurance may be impacted.
6. A Company's Appetite for Risk
Although excess, specific and aggregate stop-loss or reinsurance cover provides a Self-Insured entity with a degree of certainty regarding possible financial risk, a Self-Insured company with poor experience can have a potentially higher maximum cost than had it remained fully- insured.
The coverage protecting the Self-Insured company or group will, therefore, need to be negotiated to ensure that the Self-Insured retention and maximum potential loss do not expose the company or group to an unacceptable financial risk.
7. A Company's long-term objectives
Self-Insurance requires a long-term approach. 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 realized after a period of time.
Cost control and loss prevention techniques can take time to come into effect. Furthermore, relationships with excess insurers can take time to develop. A strong working relationship and level of comfort can often only be generated over a period of time and with positive results.
If a company is committed to enhancing its bottom line and improving its loss and safety record through proper monitoring and action, then it’s probably an ideal candidate for Self- Insurance. If it is purely seeking a short-term monetary gain, it is probably not.
8. Past loss experience
A company that has had a high level of loss activity may wish to improve its claims performance prior to adopting a Self-Insured plan.
Special regulatory factors influencing self-insurance in the United States
In the USA, insurance policies and their distribution are normally governed by state insurance departments who require insurers to be licensed to transact business in each state. This is either on an admitted or a surplus lines basis, with the latter being restricted to certain classes or circumstances of the business.
Apart from employee benefits (governed by the Employee Retirement Income Security Act of 1974), Self-Insurance is only regulated by individual states for classes of business that could affect an injured party and which employers are required to provide by law such as workers compensation and automobile liability.
For other classes of business, regulations apply to the supplier of the coverage as opposed to the company purchasing insurance. Therefore Self-Insurance can usually be adopted without reference to state legislation.
States do however regulate captives and risk retention groups when filed for use or domiciled in the state.
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