Self-insurance is whereby the company opts to retain its potential risks and cover them from the working capital, personal savings or from an established and managed funding reserve rather than transferring the risk to the third party like to an insurance company. The company will undertake to pay all loses in-house, and a detailed account of self-insurance is given in this article.
There are different self-insurance options where the company retain all their risks or transfer a percentage of the risks to an insurance company. 100% self-insurance This is where the company retains all its risks such as self-motor insurance and self-health insurance and pays for all the losses from working capital or from a self-funding account. Excess arrangement The company retains a portion of the risk and transfers much of the risk to an insurer. Different types of excesses are normal policy access which is applicable to all losses, aggregate excess and franchise. Under the aggregate excess arrangement, the insured pays claims up-to a certain aggregate limit before the insurer chips in. How to build a self-insurance arrangement Self-insurance is all about paying for company losses without seeking external insurance protection. The company can set aside some funds and build self-funding reserves to cater for all the losses as they occur. Alternatively, the company may choose not to set aside money but pay the losses from working capital and an individual pays the losses from his savings.
Importance of self-insurance
Promotes good risk management Self-insurance promotes good risk management programs to be adopted by the company in order to minimise and prevent losses. All in all, risk management is a process of preserving company assets as well as preventing losses to human life and to company assets. Boost the company’s balance sheet The self-fund reserves remain the company assets, thus the less the money is used to pay claims, the more the reserves grow.
Disadvantages of self-insurance
No tax exemption The self-fund money is subject to tax whereas insurance premiums are not taxable. Can strain company resources If a self-fund is not managed well and is not supported by the implementation of good risk management programs, the fund can be easily wiped out. Moreover, the fund can be wiped out by one catastrophic event.
How self-fund reserves are managed
Self-fund reserves and the claims management can be handled in-house by the risk department or account and investment department, through an insurance company or broker and/or through a financial institution like an investment bank.