Business Insurance: Self Insuring versus Buying Traditional Insurance

By Compuquotes Team on May 21st, 2008

Business Insurance

As more large organizations, such as municipalities and fortune 500 organizations, decide to self insure instead of purchasing traditional insurance, many small to mid sized companies wonder if they too would be better off by self insuring for their losses. To Self Insure basically means that instead of purchasing insurance an organization will cover any losses out-of-pocket. Though, most organizations see this as an opportunity to save money by decreasing their insurance premium and taking a more proactive stance on claims. The decision to self-insure should not be taken lightly. As you weigh the pros cons, remember that it may take months or even a year or two to be able to actually make the leap.

First of all, are you in a position to hire additional personnel; or does your current staff have the training or certifications and licenses needed to process claims? Purchasing traditional insurance allows you the ability to let someone else handle the back end and day- to-day claims processing tasks. Self Insuring on the other hand, requires that you handle these tasks on your own, or hire an outside third party administrator or TPA to handle these duties for you. The fees for these firms vary and often depend heavily on your claim load for the year.

Are you in a position to take a proactive stance on claims? Organizations that self-insure choose this method, because it is supposed be cheaper for them. However, if you are in no position to start programs or hire personnel or consultants who are aimed at reducing claims, you may find that traditional insurance is cheaper. The most common of these programs would be job safety and employee wellness initiatives. There are also defensive driving programs as well.

What does your claims history say? The best indicator of whether or not your organization should decide to self-insure instead of buying traditional insurance would be your claims history. Perfect candidates for self-insuring would have a claims history that displayed a large number of low impact claims. In other words, you want a lot of cheap claims. What you do not want to see is few high impact claims. These are claims costing a lot of many. So, why do would we rather see a large number versus a smaller number of claims? In a nutshell, forecasting. The more claims your organization has the better prepared you are to correctly estimate the outcome and cost of that particular outcome.

Finally, can you truly afford to self-insure. Because awards from lawsuits and in some cases workers compensation can in many cases surpass $100,000 easy, companies especially small ones need to be honest with themselves about whether or not they can afford to self insure. Sure insurance may seem pricey at first, but you compare a couple thousand to a couple hundred thousand, you may feel differently. Not to mention the fact that most self-insured firms buy insurance. Excess coverage is typically purchased by self insuring firms in order to cap their losses.

For most small to mid sized organizations self insuring could mean bankruptcy or even worse. The whole concept of insurance is to transfer the risks that you are unable to swallow. So, if you are a small to mid-sized business, the best advice is to leave high claims to the insurance companies or the big boys.

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