Insurance Risks that can be Self-Insured
Generally all classes of insurance risk are suitable for self-insurance providing that the premiums are high enough to offset the cost of maintaining a self-insured program, overall losses are sufficiently low and exposure to unexpectedly high losses can be controlled. Some types of risk that protect against injury to individuals have special self-insurance legislation as these coverages are required by law.
5.1. Regulatory Factors influencing Self-Insurance
In the USA, insurance policies and their distribution are normally governed by state insurance departments who require insurers to be licensed to transact business in each state either on an admitted or a surplus lines basis with the latter being restricted to classes of business. Apart from employee benefits (which is pre-empted by the Employee Retirement Income Security Act of 1974), self-insurance is also regulated by individual states but only for classes of business that could affect an injured party and which employers are required to provide by law, namely workers compensation and automobile liability.
For other classes of business regulations apply to the supplier of the coverage rather than insisting that a company purchases insurance and therefore self-insurance can be adopted without reference to state legislation. States do however regulate captives and risk retention groups when filed for use or domiciled in the State.
5.2. Economic Factors influencing the Decision to Self-Insure
There are three basic financial issues that a company needs to consider when contemplating self-insurance.
(i) The size of the organisation self-insuring requires not only some investment but also an allocation of management time. If these resources are too precious due to a company's size then self-insurance should not be contemplated. A general guideline is that a company should be paying in excess of $750,000 in premium for the type of insurance that is to be self-insured and for employee benefit programs the employee count should be in excess of 50.
(ii) Past Loss experience A company that has had a high level of loss activity may wish to improve its loss (claims) performance prior to adopting a self-insured plan. The reason for this is that otherwise it will not only be paying a lot of claims out of its own pocket but will also be paying high premiums for its specific and aggregate reinsurance.
(iii) The Cost of Excess Insurance The pricing of excess or specific and aggregate is fundamental to small to medium sized companies that are dependent on the cover to limit their downside. Premiums on these insurances are normally adjusted for loss experience but will also vary according to market conditions. If the pricing is greater than expected the self-insureds' financial position will be impacted. Apart from maintaining satisfactory loss results Self-insureds can benefit from developing long-term relationships with their excess insurers. When the market is hard or results are poorer than expected long-term clients who have a good trading relationship with insurers are often given preferential terms.
5.3. Examples of Classes of Business that are commonly Self-Insured in the USA
(i) Workers Compensation Certain. In the USA cdertain states allow businesses to become qualified self-insureds without the need for a licensed insurer. However the criteria imposed upon companies by states in order to qualify as a self-insurer normally include the acquisition of excess insurance as well as the submission of a bond or other form of collateral equivalent to the company's self-insured retention. Both these requirements are to ensure that funds will always be available to pay injured workers in the event of the qualified self-insurer becoming insolvent or being unable to meet its financial obligations to pay losses.
(ii) Employee Benefits Under federal legislation passed in 1974 known as ERISA, employers are allowed to step away from the state regulated benefit programmes and self-insure their employee benefit programs. Apart from the advantages traditionally associated with self-insurance, the advantages are significant as, unencumbered by individual state regulation, employers can design their own benefit plans to suit their workforce.
(iii) Commercial Automobile Liability Commercial automobile liability is often self-insured and is regulated by individual states. Because of the potential catastrophic claims that can arise from an accident and the resulting negative impact on a company's reputation self-insurance serves to focus a company on improving safety performance. With self-insurance a company has a greater interest in making sure that its vehicles are safe and that its employees are properly trained and not exceeding their hours. Unless a company's balance sheet is sufficiently strong, self-insuring commercial automobile liability requires the purchasing of specific and aggregate coverage to protect the company from large individual or a poor run of losses. Commercial automobile physical damage exposures are normally not self-insured in the true sense as values are comparatively low and larger companies normally elect to either not insure these exposures or, if they do, keep a very high retention.
(iv) Commercial General Liability In recent hard markets insurance for some of these exposures were unavailable and self-insurance was the only option for many companies. Liability classes can be attractive to self-insurers as loss potential is significant and therefore companies have a greater interest in loss prevention. Also due to the fact that claims are not normally settled for a number of years companies can experience enhanced cash flow as funds can be diverted to other parts of the company's business to improve its performance.
(v) Products Liability As with all types of self-insurance policyholders are not restricted by policy exclusions and self-insuring this class is attractive when coverage is not available in the commercial marketplace.
(vi) Hospital Professional Liability In a constantly changing industry where new treatments are appearing every week insurers are often reluctant to provide full coverage for medical malpractice. Consequently increasing amounts of hospitals have turned to self-insurance to solve their insurance needs. Many hospitals find it easier to join group schemes and have formed risk retention groups, which are then able to purchase excess insurance in the commercial insurance marketplace.