What You Need to Know About Self-Insurance Programs

What You Need to Know About Self-Insurance Programs

When it comes to risk financing for Contractors, there are a variety of methods that can be used to fund “hazard” losses. From Large Deductible Programs to Captive Insurance Programs, and more. One method for Contractors might want to consider is a Self-insurance Program. Before you do, here are 6 facts of what you need to know:

  1. Self-insurance programs vary with respect to which lines they cover, how losses are to be funded, how and whether excess insurance is provided, and how ancillary services such as claims management are to be provided.
  1. Self-insurance programs are best suited for coverage lines with a higher frequency of claims and longer payout patterns, such as Workers’ Compensation. Benefits are statutorily prescribed and in most states are the exclusive remedy for work-related injuries. As a result, litigation over amounts owed to claimants is minimized. Work-related injuries are routine enough to provide a high degree of confidence in loss projections, allowing contractors to make good decisions regarding an appropriate retention level and excess insurance attachment point. The long-tail nature of claims increases the cash flow benefits of self-insurance.
  1. Self-Insured programs are generally not feasible for small firms as they have neither adequate loss credibility nor the financial resources to qualify.
  1. Most construction contracts require contractors to provide certain types and amounts of insurance, as well as a certificate of insurance verifying that the required coverages are in place. Many project owners will not accept self-insurance to satisfy contractually required coverages. 
  1. A formal self-insurance program can be funded on a "pay-as-you-go" basis from operating cash balances or pre-funded through systematic payments into a special fund for losses and reserves. The pay-as-you-go method exposes self-insured contractors to more volatility in their periodic financial statements. Some companies will be less tolerant of these swings than others. Funding reserves with regular payments spread the impact of losses more evenly and minimize the appearance of instability. Publicly traded companies, for example, may prefer to fund losses and avoid the scrutiny that large fluctuations in earnings can elicit. 
  1. Third-Party Administrators (TPA) can provide most of the services insurance companies traditionally perform. TPA’s assume no underwriting risk, collect no insurance premiums, and have no ownership in loss reserves. They are paid a fee to perform in specific administrative and professional capacities. Actuarial and claims adjusting services can also be obtained from independent consultants or adjusting agencies.

Not sure if a Self-Insurance Program is right for you or if you would qualify for one? Reach out to TSIB and speak with one of our Risk Consultants. Let us help you find the right insurance plan for your business.

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