Self-insurance has been around since the swinging 60’s, but really started gaining ground back in the late 80’s and early 90’s. During this time there was a limited market for commercial public sector insurance such as Public Liability, Employers Liability and Property Damage.
Despite its name, it often doesn’t mean 'not being insured at all' (that would be silly); although, technically if you have a large enough fund, then anything can be self-insured. Generally speaking, it's the process of retaining the risk of any predictable losses, whilst insuring the unpredictable ones.
In this post we will take a look at the key advantages and disadvantages of Self-Insurance, to give you the best idea of whether or not it's right for you...
There are a raft of benefits which come with self-insurance. That said, don’t take these as only the reason to jump in. Opting to self-insure is a big decision, and you should weigh up the benefits against the risks detailed in the next section.
1. Lower insurance premiums: By having a proportion self-insured, your premiums on insured risks will reduce, as your insurance company is not exposed to risks which have a high likelihood of being claimed on. Also, your premiums may reduce due to a lower rate of claims. Just sit back and wait for a pat on the back from your boss!
2. Increased budget certainty: The insurance market is an unpredictable one. Premiums can fluctuate dramatically from one year to the next. This can have serious implications for your budget. Self-insurance helps to smooth the peaks and troughs.
3. Faster claims resolution: No small print loopholes or sluggish insurers are involved to scupper proceedings. By managing things yourself, you can be confident that the claim will be processed as quickly as possible.
4. Bespoke insurance packages: You can tailor your cover to fit your organisation perfectly. This means not only will you remove any unnecessary or duplicate cover, but you will have better cover to suit the risks to which you are exposed.
5. Faster settlement (happier claimants): As you control the fund, you are able to pay settled claims much more quickly. This helps the claimant as they receive payments due quicker, and you as claims are completed more swiftly.
6. Charge internal departments: You can share the burden of insurance premiums by charging internal departments for insurance relating to them. This way the full cost doesn’t come out of your budget.
7. More control: By meeting the cost of claims yourself, you have more control over the whole claims process.
8. Ownership of the risk: Being responsible for risk gives self-insureds a strong incentive to minimise it! This often improves health and safety practice in the organisation which, in turn, makes employees feel more valued and improves productivity.
9. Tax benefits: IPT adds 9.5% to your insurance bill (10% in October). Your self-insurance fund (if kept in the UK), is classed as ‘operating profit’ and subject to Corporation Tax of 20%. So effectively your ‘insurance bill’ is 20% of your fund.
The Cons ...
While self-insurance has an array of attractive benefits, it is wise to be aware of the pitfalls that this approach can present:
1. Responsible for full liability: As a self-insured, when a claim is made your organisation is liable for the full claim. Hence a sensible approach to choosing which risks to accept should be taken.
2. Exposure to potential heavy claims: By accepting risk your organisation is exposed to the possibility of footing the bill for an expensive run of claims. Poor loss experiences can be mitigated by doing the right analysis upfront and managing your claims correctly.
3. Administrative burden: There is a fair degree of resource required in order to manage claims manually. This can be alleviated by the implementation of good quality claims management software which can automate manual and process-heavy activities.
4. Responsible for full claims process: This is a double edged sword. Where you can excel in the claims process as you own it, equally there is nowhere to hide if it goes wrong. Having robust processes and infrastructure in place is essential.
Should I consider Self-Insurance?
Download the full Beginner's Guide to Self-Insurance. The full guide goes into more details and includes additional information including:
- Is Self-Insurance Right For You?
- How Do You Do It?
- What About The Fund?
- Insider's Advice
- Claims Handling
To access the guide, click below: