Knowledge Corner

Have you considered self-insurance as an option for your company’s risks? Self-Insurance plans are when the insured takes the risk on themselves but can decide the level of risk they want to take on. Let’s examine two of the most common self-insurance plans:

Captives
Though technically an insurance company, a single entity captive is fully funded by that entity and uses the funds placed in the program to pay losses. 

 A single entity or single cell captive is a legal entity, licensed as an insurance company, to insure a proportion of its shareholders’ risks. It is an insurance company owned by the captive members (shareholders). The captive members will accept a predetermined level of risk and pay the associated premiums for the administration of the captive (fixed costs) to the captive insurer. 

When you become a shareholder of a captive, you will gain control over a range of unpredictability in the traditional insurance market. Traditional insurance markets focus on the carrier’s overall profitability which results in inefficiencies where you pay more for a policy.  With a captive, pricing is stabilized while outperforming the traditional markets.
 
Additionally, captives allow for the opportunity to capture underwriting and investment income. They can deliver investment income on your premiums, which compound the return of premiums through effective risk management and claims oversight. It can become another profit center and allows you to build additional equity. Captives can be a tool for increasing primary limits or enhancing coverage. Both can give your company a distinct advantage over the competition when pursuing new business 

Self- Insurance 
Self-insurance is when the client does not purchase an insurance policy but relies solely on their own funds (ex. balance sheet) to pay their claims. Companies can opt to self-insure their risks for many reasons, including a lack of availability of insurance or the financial expectation that their annual claims costs will be less than their premiums. Caveats to self-insurance include:

• The cost of administration
• Contractual issues
• Cash flow being affected by cost fluctuations

In addition, self-insured workers’ compensation coverage may not be allowed by your state

Companies can choose to either be completely self-insured and not buy any level of insurance or can limit their exposures and protect themselves only for a truly catastrophic claim. 

If they choose the latter, then the insured will need to set their “attachment point” for the excess policies to pick up the coverage. This is usually a discussion between the insurance companies and the client and is most likely above $1 million and can be as high as $5 million.  

Regarding a Self-Insured Program, when the “attachment point” is selected, it is the maximum amount you are required to pay before the insurance company begins payments.  The maximum payment amount is called the Self-Insured Retention (SIR).  Unlike a deductible, if you do not pay the SIR, the insurance company has no obligation to make any payments. SIR payments are required first before the insurance company begins its payments.  

Interested in self-insurance or other alternate risk financing options? Reach out to TSIB today and schedule a free consultation with one of our Risk Advisors!

TSIB’s Risk Consultants are currently servicing the following locations:
East Coast: New York City, NY; Bergen County, NJ; Fairfield County, CT; Philadelphia, PA
Texas: Austin, San Antonio, Houston, Dallas
California: Orange County, Los Angeles County, Riverside County, San Bernardino County, San Diego County

Image credit: shutterstock.com/Dilok+Klaisataporn