When Does a Self-Insurance Strategy Make Sense for My Business?
Every business requires some form of insurance to limit operational risks. Most often, companies purchase insurance policies through third-party insurers and pay a regular premium for coverage.
But with the rising cost of health insurance and other policies, businesses are looking for alternative strategies to manage risk and cut costs. One popular risk management strategy is self-insurance.
What is Self-Insurance?
Self-insurance is what it sounds like, where a business takes on all the financial risks associated with insurance policies. Self-insured employers set up a trust or similar account to set aside funds for claims.
Every business is unique and the decision to pursue a self-insurance strategy ultimately depends on individual companies’ goals and needs. That said, there are several common issues why employers explore self-insurance:
• Better Cost Control: Perhaps the biggest benefit with self-insurance is greater cost control. Self-insured businesses pay only for the cost of their claims rather than the added cost of insurance premiums. Additionally, self-insurance allows you to set your own plan details such as deductibles, copays, maximum payouts and more. Self-insured companies save money for years leading up to having to pay out on claims as opposed to traditional insurance where policies often only last for one year.
• Cash Management: Under traditional insurance, you pay roughly the same premium every month, regardless of the number, type or size of your claims. But if you’re self-insured and your claims activity is low, you can keep more of your operating capital working for your business. For example, you can earn interest on any unspent funds that you’ve set aside for loss claims, making a return for your business rather than paying an insurer.
• Benefits Flexibility: A self-insurance model gives your business complete control and flexibility over the benefits you offer employees. For example, you can create health plan tiers or set up a private health exchange using our ClearPath Prime platform. You may also combine self-insurance with traditional insurance by offering a self-insured health plan but purchase dental and vision benefits from an insurance company.
• Company Size: Self-insurance generally benefits larger companies with hundreds of employees over smaller businesses. Larger employers can take advantage of their larger risk pool. But depending on the risk you’re insuring against even small businesses can benefit from self-insurance.
Disadvantages of Self-Insurance
Although self-insurance offers numerous benefits for businesses, there are potential drawbacks. Keep the following in mind if you’re considering whether to pursue a self-insurance strategy:
• Administrative Costs: Setting aside funds to pay for claims is not enough. Businesses must establish a system to process claims and make payments. This may mean hiring additional staff or contracting with a third-part administrator to administer your insurance program.
• Privacy Concerns: If you choose not to contract with a TPA, internal staff will be processing claims for their coworkers. Such a setup can create tensions and potential issues surrounding the confidentiality of medical issues. Additionally, it places a business in the position of potentially having to deny coverage for an employee, rather than having the insurance company or TPA make that decision.
• Cash-Flow Fluctuations: If self-insured, your claims expenses may fluctuate from month to month, which can create operational and planning challenges. If you choose to self-insure, it’s best to create a budget line item for your self-insurance bill much like you would with a traditional insurance premium to ensure you have enough funds set aside to handle claims.
• Government Regulations: If you self-insure, you may face some type of government regulation such as posting a bond, setting aside a certain amount of funds in escrow for claims or providing some type of reporting to your state government.
Trying to decide whether self-insurance is right for your business? The experienced team at Lovitt & Touché can work with your organization to assess your existing risk management strategy and provide tailored guidance related to self-insurance that aligns with your goals, needs and costs. Learn more about our self-insurance and other alternative risk financing options.