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.