Rising prices are putting pressure on businesses. To take control of their costs and save money, some are turning to self-insurance for their property and casualty risk management needs.
What Is Self-Insurance?
According to Investopedia, self-insurance is a type of risk management strategy that involves setting aside a pool of money to cover unexpected losses. In some cases, this strategy may be more cost effective than traditional insurance, especially when losses are small and predictable. By cutting out the insurance carrier – the middleman – businesses can theoretically save money.
This strategy differs from a traditional insurance setup, in which policyholders pay premiums to insurance carriers. If a covered loss occurs, the carrier pays the claim, up to the policy limits. The policyholder may also have to pay a deductible. A self-insurance arrangement eliminates the insurance carrier. Instead of paying premiums to an insurance company, you add money to a fund dedicated to covering losses.
A similar strategy is to establish a captive insurance company. According to the National Association of Insurance Commissioners (NAIC), captives are a type of self-insurance. However, instead of simply setting funds aside for losses, the business establishes a subsidiary company that the parent company owns. The subsidiary company exists purely to provide insurance coverage to the parent company. This method has tax advantages in addition to the cost savings potential.
Businesses often use self-insurance for employee health plans. However, the strategy can be applicable for any types of risk, including those covered by property and casualty insurance.
More Businesses Are Embracing Self-Insurance
Although it may be possible to save money by self-insuring, many companies find it’s easier to go the traditional insurance route. This is assuming they can secure the coverage they need at a reasonable price – recently, many businesses have been unable to do so.
High inflation and natural disaster losses have impacted the commercial property insurance market. The Council of Insurance Agents & Brokers (CIAB) says rates were up in the first and second quarter of 2023 by 20.4% and 18.3%, respectively. Additionally, deductibles have increased whereas insurance capacity has been low, causing some policies to face non-renewal. Some regions have suffered even more. For instance, The Real Deal says commercial property premiums could double for some accounts in Florida.
This is just the latest example of a troubled insurance line. Cyber liability, commercial auto, and D&O insurance have all faced hard marketing, making it challenging for businesses to secure coverage. In addition to increasingly unaffordable premiums, they may see more restrictive terms, lower limits, and higher deductibles. Even if companies pay the high premiums, they may not receive the coverage they need to manage their risks.
According to Risk & Insurance, faced with a hard insurance market and economic uncertainty, businesses are turning to alternative risk management solutions. Self-insurance is one attractive option. Business Insurance says captive insurance formations increased in 2022 and were expected to continue to increase in 2023 in response to high property and cyber rates.
Succeeding with a Self-Insurance Strategy
Theoretically, it’s possible to save money by leveraging self-insurance. However, success isn’t guaranteed. To make the self-insurance model work, businesses need:
- Funds to cover losses. The whole concept of self-insurance revolves around the idea of setting aside funds to pay for losses. However, you shouldn’t only prepare for low-frequency, low-severity losses – you also need to be ready for a worst-case scenario.
- A proactive stance on loss prevention and containment. Even though you’ll set aside funds for losses, you should do everything in your power to prevent those losses from happening. By implementing good risk management practices, you’ll reduce the chance of claims. Since you’re self-insuring, you’ll directly benefit from the cost savings.
- An efficient claims system. This is where a lot of businesses stumble. Efficient claims handling is a critical part of controlling costs. However, some claims systems increase costs by adding unnecessary touchpoints, dragging out claim cycles, and wasting time. Your claims system should also provide data that can help you take control of losses.
When you make the decision to self-insure, you have two basic options for managing claims: you can build your own claims system or you can leverage an existing SaaS model. When you build your own system, you can design it with your exact needs in mind. The downside is it will take time and money. Plus, you may need to deal with numerous bugs along the way. When you leverage an existing system, you reduce costs, set up your system faster, and may be able to customize the system to meet your needs.
With the VCA platform, managing claims has never been easier. Self-insured companies can configure the system to meet the unique needs of their industry and gain insights to help them manage their losses. Download the case study to see how a self-insured company averted disaster by replacing their legacy claims system with VCA software. Then learn what VCA can do for you.