Is Self-Insurance Really an Option?
Self-insurance doesn’t mean having no insurance. It also doesn’t mean crossing your fingers and hoping for the best. It actually describes the action of retaining predictable losses, whilst ensuring potential, unpredictable losses instead.
In other words, it is a creative risk management method that involves retaining and managing an eligible, predictable amount of risk, and calculating and setting aside an amount of money that will cover an unpredictable future loss.
Self-insuring is about storing a reserve for future losses, instead of purchasing insurance to cover them. It is a way to set aside a stash of cash for you to use for your insurance needs.
What To DoDoing this requires creating a loss fund limit. This establishes the usual and unexpected pool of losses within the self-insured retention in the stated policy period. Rather like having an insurance premium, this is done by setting aside an amount. The amount must be sufficient to cover the potential future loss. In principal the idea is similar to insurance, but involves the payment of the self-insurance premium being paid to a captive insurance company or rent-a-captive insurer; or by making a financial payment provision and not paying an insurer at all.
How To Do ItIt is possible to self insure any risk that is predictable enough to be able to work out how much money will need to be set aside, just in case there are future unpredictable losses. For a risk to be considered insurable it has to represent an event that the insurer could not possibly have foreseen. Catastrophic risks, like earthquakes for instance, are not usually considered self- insurable however, because they are too unpredictable, and potentially have a huge loss value. Captive insurance is often able to cover part of a risk that is potentially catastrophic.
How It WorksFull or exclusive self-insurance is not recommended. This is simply because a combination of commercial and self-insurance will provide the best cover for any self-insurer. This operates well because the initial predictable risk losses are retained and self-insured, and this forms a first layer of cover protection.
A stopgap commercial insurance policy is also purchased along side this. The policy provider will then cover the losses above the self-insurance loss fund limit. The losses paid for by the insured, before the loss limit is reached, will then create the deductible layer. The cost of the commercial insurance cover in this situation will become less expensive over time, as the commercial insurer moves from the first layer of paying claims.
Is Self-Insurance a Good Idea?Self-insurance is generally less readily available for those interested in purchasing insurance. This is simply because an individual will rarely have made enough cost-savings on premiums to warrant making negotiations with self-insurance captives or insurers. Self-insurance does work well within a small business environment.
How to Build up a Self-insurance Fund
- Consider eliminating some of the insurance policies for which you are able to pay for the risk yourself. For instance, full coverage car insurance for a car that is of little value, or insurance cover on jewellery items that you would comfortably be able to replace yourself.
- Reducing premiums, by increasing the waiting period before the insurance kicks in, on your disability insurance.
- Switching to emergency health insurance – which kicks in after a large deductible – will allow you to save a sizeable amount on premiums. Your self-insurance will cover the cost of minor medical procedures or doctor’s visits, whilst your health insurance will continue to cover the cost of any substantial emergency.
- Check for duplications in insurance cover. This is a frequent occurrence so it is always worth checking the small print on all your policies.
- Review your insurance program from time to time. Your insurance needs change over a period of time, so this is the best time to check and make any necessary adjustments. It will allow you to make sure you have sufficient coverage and also keep premiums low.
- Keep detailed and complete records of all your policies, including premiums paid and loss recoveries. Doing this will help you get lower cost coverage in the future.
You will want your self-insurance money to be working for you whilst it is waiting to be used. The best way to do this is by short-term investment, which can be easily turned into cash without attracting a large loss in value. Money market accounts or mutual funds work well in this way. Stocks and bonds however, do not. A standard savings account will provide a lower return, but does offer a safer, quicker way of accessing your money.