Self-Insurance: Manage Risk While Optimising and Sustaining Your Company’s Growth

Did you know that alien abduction insurance has been available in the USA since 1987? Today, it would be unusual to find someone who has not purchased some form of insurance, whether it be for his/her car, home, life or business. Insurance gives us the financial security against unforeseen, calamitous and sometimes tragic events, with insurers providing policies for these risks, and many, many others.
 
Many organisations have processes in place to manage risk. But, they are often inward-looking and rely on traditional insurance products, rather than being forward-looking and pro-active.
 
Our view is that company’s need to start taking a holistic approach to risk, moving from being reactive and compliance-driven, to being proactive, and using risk as a strategic driver to optimise earnings.
 
Is Self-Insurance Really an Option?
 
Self-insurance is a creative risk management method that involves retaining and managing an eligible, predictable amount of risk and calculating, and setting aside an amount of money that will cover an unpredictable future loss.
 
It is about storing a reserve for future losses, instead of purchasing insurance to cover them.
Doing this requires creating a loss fund limit to establish the usual and unexpected pool of losses within the self-insured retention in the stated policy period. Rather like having an insurance premium, this is done by setting aside an amount. The amount must be sufficient to cover the potential future loss. In principle, it involves the payment of the self-insurance premium being paid to a captive insurance company or rent-a-captive insurer, or by making a financial payment provision and not paying an insurer at all.
 
In practice, almost all companies have always had an element of self-insurance. The inclusion of an ‘excess’ on an insurance policy is the most common form of self-insurance.
 
Exclusive self-insurance is not recommended. This is simply because a combination of commercial and self-insurance will provide the best cover for anyone. This operates well because the initial predictable risk losses are retained and self-insured, and this forms a first layer of cover protection.

How to Build up a Self-Insurance Fund

  • Remove some of the insurance policies for which you can pay for the risk yourself. Examples are, full coverage car insurance for a car that is of little value, or insurance cover on jewellery items that you would comfortably be able to replace yourself.
  • Reduce premiums on your disability insurance, by increasing the waiting period before the insurance kicks in.
  • Check for duplications in insurance cover. This is a frequent occurrence, so it is always worth checking the small print on all your policies.

Some of the Many Benefits of Self-Insurance:

  • You determine your own insurance programme and premiums;
  • You can insure risks that are difficult to insure via conventional insurance and it can be applied to any type of cover;
  • Reduce the overall costs of insurance;
  • You can develop an insurance strategy for longer periods, without worrying about the effect of changing approaches by third-party insurers.
  • You are enabled to retain tax-efficient risk for your own account. It enhances cash flow and financial stability.

Insurance is intended to help protect your assets and your wealth. It helps to limit the financial impact of certain disasters and tragedies you may face. Even though it can be exasperating to give money to the insurance companies every month, it is worth the peace of mind of knowing that the companies will be there when you need them.