The Advantages of Self-Insurance
1. Self-Insurance Cost Savings
The principal aim of Self-Insurance is to improve a company’s operating profits by reducing its claims and premium costs. By assuming the role of an insurer, costs such as the overheads for policy administration, the assumption of risk and underwriting profit are retained by the Self-Insuring company.
Self-Insurance plans also avoid premium taxes and residual market loadings which can be charged on insurance premiums. Although these are normally charged on any excess or specific and aggregate coverages, they can be significantly less because the excess premiums are much lower than the full coverage equivalent.
2. Self-Insurance Plan Design
Self-Insurance plans and supporting excess or risk transfer programs can often be modified to provide coverage that commercial insurers are unable to offer. For example, Self-Insured medical benefit plans can be tailor-made to individual company requirements and risk retention groups and captive companies are often set up to provide coverage not generally available in the commercial marketplace.
3. Improved Loss Experience
Self-Insurance often brings improved loss experience as the company (or group) that is Self-Insuring becomes accountable and is at risk for its own losses. As much as a company can gain from improved loss experience, it can also lose out from poorer than expected loss experience. Being at risk makes the Self-Insurer more aware of its exposures and this often results in the establishment of new loss prevention techniques such as safety programs.
Further examples include employee benefit plans that can be established to provide annual health checks, companies Self-Insuring workers’ compensation can have an incentive to implement safety in the workplace programs and companies Self-Insuring their automobile liability programs can have an incentive to maintain driver standards through regular driving courses. Larger companies who insure through captive insurance companies often develop their own in-house risk management divisions to manage their potential loss exposures, not only by the size of loss but also frequency.
4. A Safer Workplace
Employers who make their workplaces safer and who are able to better protect their employees’ health often achieve increased employee morale and productivity by being seen as a more caring employer.
5. Faster Loss Settlements
As a Self-Insurer is effectively paying its own losses, claims can be settled quickly and potential disruptions to the business minimized.
6. Improved Cash Flow
When a company is paying its own claims, these claims can be dealt with quickly and efficiently with financial losses to business earnings reduced. Improved loss experience improves a company’s bottom line as fewer funds are required to settle claims. With improved claims experience, claims administration costs can be reduced as well as the cost of any excess insurance.
Potential Disadvantages of Self-Insurance
The principal potential disadvantages from a Self-Insured program are the exposure to claims and the possibility that the program will ultimately cost more than it would have done, had it been insured in the traditional insurance market.
It is important to note that Self-Insurance should be viewed as a long-term strategy as some of the advantages may take time to pay dividends. For example, a workplace loss and safety training program may take time to become fully implemented.
The main possible disadvantages of self-insurance can be summarised as follows:
1. Exposure to Poor Loss Experience
A Self-Insurer can suffer from poor claims experience in any one period. However, any potential downside can be limited by excess, specific and aggregate cover or reinsurance. If the program continues to show poor results then the cost of the excess, specific and aggregate cover or reinsurance will increase and Self-Insurance may ultimately become uneconomical.
2. The Need to Establish Administrative Procedures
Self-Insurance requires the implementation of systems to settle and monitor claims as well as negotiating with other service providers such as excess insurers. However, these functions are normally out-sourced to a professional administrator, known as a third party administrator or program manager.
3. Management Time and Resources
Companies that Self-Insure will need to commit new resources to manage and oversee the Self-Insured program. Whilst many of the functions required to manage a successful Self-Insurance program can be outsourced to professional service provider companies, a Self- Insured company or group will need to create monitoring and review procedures to ensure that the program is being properly managed.
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