What Is Self-Insurance?

Self-insurance is one such strategy, in which a business forgoes a third-party insurance policy in favor of independently setting aside funds to cover unexpected claims that may arise. This can be used against virtually any type of potential damage or loss, but is not always advisable.

The logic behind self-insurance is that providers calculate premiums based on forecasted risk. These figures are designed to profit the insurance company by bringing in more money than they are likely to pay out. Under this reasoning, a business should theoretically be able to set aside funds in case an incident occurs—protecting themselves without an insurance company taking a cut.

However, businesses must also be aware of relevant insurance regulations. Federal law requires any business with employees to hold unemployment, workers’ compensation and disability insurance, but state guidelines may also call for additional policies. Failure to comply with these requirements can lead to costly penalties, so decision makers should speak to qualified insurance professionals before choosing a course of action.

To help you weigh your options, BCS has outlined the key advantages and disadvantages of pursuing self-insurance.

Advantages & Disadvantages of Self-Insurance

Pros

Cost: In some cases, self-insurance may be more economical for businesses more likely to face infrequent and/or minor losses. Since monthly premiums add up and claims may increase these expenses, maintaining a fund to cover costs as they arise may be an affordable alternative. For example, a business located in an area not prone to flooding may skip flood insurance in favor of self-insurance. The facility could still flood, and the business would have to pay for damages, but the relatively low risk may make self-insurance an appealing option.;

Interest: The funds you earmark for self-insurance can accumulate interest until you need them, growing substantially if you have infrequent losses.

More Control: With self-insurance, you’re not bound to insurance policy fine print containing specific exclusions and stipulations. You can spend the designated funds to cover virtually any incident, and don’t have to worry about using an insurance company’s preferred vendor list.

Cons

Potential for Significant Loss: Some types of claims can be extraordinarily costly. Even if unlikely, a business may not be able to cover such an incident through self-insurance alone. Because of this, most companies prefer to purchase third-party insurance policies to cover infrequent—though potentially significant—losses they’re unlikely to be able to pay on their own.

In-House Administration: You will need a staff member or third-party administrator to manage the funds, pay out claims, and maintain records, which can reduce the cost-effectiveness and convenience of self-insurance.

Inconsistent Expenses: Since claim amounts and frequency may vary, it can be difficult to anticipate how much you need to put into your self-insurance fund.

Government Regulations: Businesses with enough employees are required to hold certain insurance policies. Failure to do so can result in hefty fines. Self-insurance may qualify, but you’ll need to be careful to stay in compliance.

It Boils Down to Risk.

All forms of insurance are essentially risk transfer strategies. When you purchase an insurance policy, you are paying a third party to shoulder some of the risk. If you self-insure, however, you are choosing to retain the risk yourself.

The ideal solution for many businesses will likely be a blend of third-party policies and self-insurance. After all, most businesses are unlikely to find policies that cover all potential exposures, and taking out specialty lines for every uncommon risk you might encounter would be cost-prohibitive.

Full-Service Tracking to Meet Your Unique Needs

Every business should select insurance based on their specific needs and risk posture.

However, when partnering with third-party vendors, organizations must also consider their insured status to maintain compliance and mitigate liabilities.

To streamline document storage, tracking, and correction processes, cloud-based solutions not only enable easy access to certificates of insurance (COIs) and other documents, but automatically correct deficiencies, for a painless return to compliance.

It’s as easy as 1, 2, 3: uploading the insurance documentation, storing it in the secure cloud server, and letting the automated technology highlight fields in need of correction.

Whether your vendors are self-insured, under a conventional policy, or some combination of the two, BCS full-service tracking seamlessly manages all the intricate details of the COI tracking process so you can focus on running your business.

BCS is a leading vendor management solution offering full- and self-service COI tracking options designed for vendor management, onboarding, and so much more. To effortlessly manage your third party insurance documentation, contact us today or schedule a demo.