With the growth of risk management and the increased emphasis on finding the most appropriate technique for dealing with risk, alternatives to commercial insurance and to the traditional forms of retention have developed. These include self-insurance programs, captive insurers, risk-retention groups, and risk-sharing pools.
The term self-insurance has become a well established part of the terminology of the insurance field, despite disagreement as to whether or not such a mechanism is possible. From a purely semantic point of view, the term self-insurance represents a definitional impossibility. The insurance mechanism consists of transfer of risk or pooling of exposure units, and since one cannot pool with or transfer to himself or herself, it can be argued that self-insurance is impossible. However, the term is widely used, and we ought therefore to establish an acceptable operational definition, semantically incorrect through it may be.
Under some circumstances though, it is possible for a business firm or other organisation to engage in the same types of activities as a commercial insurer dealing with its own risks. When these activities involve the operation of the law of large numbers and predictions regarding future losses, they are commonly referred to as “self-insurance”.
If you’re considering self-insurance, it’s advisable to employ an company who are specialists in self-insurance auditing to make sure you can cover the costs of an accident or unforeseeable event. Australia Risk Services offer these as part of our suite of property risk assessment services.
When considering the costs of insuring your company, it also pays to have a public liability risk assessment. With our self-insurance auditing services, we can assess which public liability risks your workplace has and how to reduce their impact – both on the public and your wallet.
To be operationally dependable, such programs must possess the following characteristics:
The organisation should be big enough to permit the combination of a sufficiently large number of exposure units so as to make losses predictable. The program must be based on the operation of the law of large numbers.
The plan must be financially dependable. In most cases, this will require the accumulation of funds to meet losses that occur, with a sufficient accumulation to safeguard against unexpected deviation from predicted losses.
The individual units exposed to loss must be distributed geographically in such a manner as to prevent a catastrophe. A loss affecting enough units to result in severe financial loss should be impossible.
Even apart from its semantic shortcomings, self-insurance is an overworked term. Few companies of organisations are large enough to engage in a sound program meeting the requirements outlined above. In the majority of cases, risks are simply retained without attempting to make estimates of future losses. In many cases, no fund is maintained to pay the losses. Furthermore, until the fund reaches the size where it is adequate to pay the largest loss possible, the possibility of loss is not eliminated for the individual exposure units.
As we have noted above that while self-insurance is technically a definitional impossibility, the term has found widespread acceptance in the business world. Self-insurance programs are distinguished from other retention programs primarily in the formality of the arrangement. In some instances this means conducting a self-insurance audit and obtaining approval from a regulatory agency to retain risks, under specifically defined conditions. In other case, it means the formal trappings of an insurance program, including funding measures based on actuarial calculations and the contractual definitions of exposures are self-insured. When the self-insurance involves third parties as in the case of employees covered under an employer-sponsored health insurance program, there is a need for the formal trappings of insurance, such as certificates of coverage and premiums.
Over the past three decades, the use of self-insurance by business and other organisations in dealing with risk has grown significantly. In some areas, such as employer-sponsored health benefits for employees, it has become a major alternative to commercial insurance. Given the growing importance of this approach to dealing with risks, it seems appropriate that we consider some of the reasons for its growth. Contact Australian Risk Services for the most accurate self insurance audits Australia wide.
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