How Self-Insurance Works | SIM

Self-insurance can be defined as when a company or a group of companies pays all or part of its own insurance losses and assumes the role of insurer by implementing systems to pay those claims.

Sometimes called “alternative risk transfer,” self-insurance can allow a company or group of companies to design their own insurance program. this means that they can often obtain broader or more appropriate insurance coverage than would be commercially available. Self-insurance also creates an incentive to make factories and offices safer workplaces and, if managed properly, can lower insurance premiums.

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With self-insurance, a business or group identifies its loss exposures and then makes the decision to assume the role of an insurance company by taking responsibility for settling all or part of any claims arising from those risks. By becoming its own insurer, a self-insured company or group can modify or design its insurance program, making insurance coverage more widely available than would be possible in the traditional commercial insurance market.

-insurance differs from standard insurance policies that have large deductibles in that it requires the self-insurer to adopt a formal system for paying your losses. this function is often outsourced to a claims administrator, such as a third-party administrator.

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Self-insurers need a greater awareness of potential losses and savings and, as a result, have a responsibility to take a more hands-on role in loss prevention than if they were insured in the traditional commercial insurance market. therefore, self-insurance provides an incentive to reduce claims, save premiums, and thereby increase profits or cash flow.

There are several key features that distinguish self-insurance from traditional risk transfer programs:

When a company self-insures, it will have a greater interest and incentive to ensure that losses are kept as low as possible. The reason for this is that any claims savings directly benefit the self-insured company rather than a traditional insurer.

self-insurance requires the creation of formal procedures for the processing and payment of claims. these functions are often performed through a third-party service provider, such as a third-party administrator or program manager.

By taking on the role of an insurance company and taking responsibility for claim payments, a self-insured company can not only pay claims faster, but also control the source of losses. this allows the company to make the appropriate security and loss control improvements to its facilities.

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Self-insurance also requires procedures to be established to monitor the financial performance of the program. these play an important role because negative trends can be identified and treated before they deteriorate. Often a self-insurer establishes new loss control procedures to reduce the possibility of losses or to manage them after they have occurred.

Self-insurance can allow a business to obtain insurance coverage that would not otherwise be available in the commercial insurance market. Since a self-insurer pays its own claims, policies can often be tailored to your unique needs without the impact of changes in the traditional insurance market.

Self-insurance typically requires a company to set aside funds to pay losses, often referred to as a loss fund, and also to purchase high-level excess policies or reinsurance policies to ensure that the loss fund is protected against expected claims. When constructed correctly, budgets can be set knowing that the money set aside for insurance is the maximum amount the self-insured business will be responsible for. If claim costs are lower than expected, the company will save money and increase profits.

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