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Self-Insurance

There are alternative risk management techniques that an organization can use in confronting their exposures to risk of loss. Self-insurance is one of those alternative risk management techniques that can be used. Basically this is where the organization retains the risk themselves versus transferring the risk.

The retention that the organization retains can be planned or unplanned depending upon the exposures to loss. While these plans can result in reduced cost of risk, there are risk management services that must now be provided internally versus through the transfer process. An organization that goes the self-insured route must provide lost control and engineering services. Along those lines would also entail inspections, surveys and safety audits. Claims handling, claims payments, and auditing the entire claims process would also be of service that the organization would have to take on in order to be self-insured. Finally, the funding to pay for the retention losses that need to be paid needs to be adequately funded.

There are advantages and disadvantages of going to the self-insured route with regards to insuring your exposures to loss.

• An organization typically will see their cost of insuring their risk via self-insuring, is lower and improves the cash flow but if there are catastrophic losses it very well could put the organization in a financial bind.
• A self-insured organization that must now take on the loss control and engineering services may find renewed interest in safety, loss prevention, and loss reduction attitudes within the organization.
• That renewed safety interest can be very positive and have a great effect on the company but it also takes a great deal of time, effort and resources to put those services in place.
• Doing risk management services internally can distract from the core focus and mission of the organization.
• If the organization is too small they might not have the expertise to manage and run this type of alternative risk management strategy.
• One way to deal with all these added services that must be maintained in a self-insured program would be to outsource them. You could have a third party administrator (TPA), that could administer and/or perform all services that are needed for this program.

The bottom line is that if all things are equal, what the organization is saving by going to a self-insured plan versus a fully insured plan is that they are not paying for the insurance carriers profits nor for any commissions that are payable in that transaction. It varies from industry to industry and from carrier to carrier but typically you’re looking at about 25 basis points, or 25%, that represents the carriers profit and/or any commissions that are paid. One of the main points to keep in mind is that by the time you internalize all these processes, services, and administration systems that need to be in place for self-insured program if you’re not realizing the 25% savings you might be better off staying in a fully insured program. In a fully insured program all of the claims, auditing, actuarial accounting, audit team, lost control, etc. services are included within the insurance premium for no additional charge. There are also tax ramifications in a self-insured program. Payments for insurance premiums are tax deductible as they are paid whereas self-insured plans are not tax-deductible until a loss or claim is paid. Many things need to be considered before the organization jumps from a fully insured program to a self-insured program.

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