Striving for Financial Security: Being Self-Insured vs. Paying a Premium

Each year companies, non-profits, and government entities ponder whether they should switch their insurance program. Weighing the pros and cons paying a premium versus swallowing the risks. Many government entities are self-insured as well as large corporations. Smaller organizations, on the other hand, generally choose to pay a premium. Although size can be a factor in your decision-making process, it is not the most important factor.

By far the most important factor must be your firm's financial fitness. Could you sustain a large loss? What would you consider a large loss? This is where most firms bow out. The reality is many organizations could not stomach more than $1,000,000 dollar loss, if that. Being self-insured means you pay. You pay for everything.

You must also consider who will handle your claims. If you pay premiums to the insurance company, then they handle all of your claims and ultimately make all of the decisions. However, self-insured companies either handle their claims personally or hire a Third Party Administrator (TPA). Considering this while weighing your pros and cons is vital. You should think of the size of your claims, human resources, or risk management staff, because the sheer volume of your claims may be too much for the number of people you have working in these areas. Or, you may not have a licensed claims adjuster who is able to handle claims.

How far should you go? You do not have to be self-insured for all lines of insurance. You may want to be self-insured for workers compensation, but not general liability or vice versa. Looking at your claims history, and the more data you have the better should make the decision. The areas where you have average frequency but low costs should be the ones considered for self-insurance. These should be lines where you feel you can best control your losses. Remember the enemy is unpredictability. The organization's track record for claims should help you predict the cost and volume of future claims. If you do not have enough data for at least the previous 5 years, you should probably hold off on self-insurance.

Can the Board, the shareholders, commissioners, etc stomach your first year. When you decide to switch to a self-insured program, the idea of "Murphy's Law," becomes very real. The largest losses your company has ever seen will be realized. And you may find yourself having to defend your decision. If you know that people whom you answer to get anxious at the first sign of losses, you may want to make sure you have all of your ducks in a row (i.e. your pros, cons, and proof) before you present this information to them.

What type of wellness and training programs do you have in place? When you decide to go self-insured, your focus must be on prevention. The ability to prevent large claims before they occur is important. If you are self-insured on healthcare and/or workers compensation you need to have wellness programs in place. These are fun ways to promote exercise, safety, and nutrition among your employees. Depending on the type of positions you have in your organization you may also want to provide various levels of training. Consider hiring an employee health nurse or a safety officer to over see these programs.

In the end, you will realize the self-insurance is more work than simply paying a premium. Yet, you may find that you save money by paying for your claims instead. In the real world, most companies, nonprofits, and government entities use a combination of these. For example, many are self-insured and purchase excess coverage for back protection. Regardless of how you decide to do it, the purpose of insurance is to assure you that whatever happens, you are covered.