Self-insurance is an insurance plan in which the individual or a company is fully aware of the risks involved. They save on insurance premiums and pay from their own pockets against the claims. Self-insurance is an excellent approach to managing financial assets. When a company is fully aware of the potential risks involved with the liabilities, then it manages its cash flow in a way that some amount is set aside to pay for any potential losses against the assets.
It all depends on the priorities and vision of the business. If a company has ample cash flows through which they can pay huge insurance premiums then they can go for traditional insurance. There are many consulting firms throughout the world that offer insurance management and risk management services. Axxima is one such insurance management consulting firm that specializes in the provision of consultation services like self-insurance and risk financing strategies.
Before diving into how you can achieve self-insurance, let us first know the pros and cons of self-insurance.
The benefits of self-insurance are bigger than the cons of it due to its minimum risk involvement.
- Leave out the hassle of paying for insurance premiums.
When a company has to pay for insurance premiums, it processes the claims through the insurance agency. On the other hand, when a company goes for self-insurance, it sets aside a huge amount in a trust or a bank account on a monthly, quarterly, or bi-annual basis. It hires a third-party administrator to manage the claims.
- Reduced cost of insurance
In traditional insurance, the cost of insurance premiums increases to cover the staffing and administrative costs over a period of time. On the contrary, in self-insurance, companies only have to pay as the claims occur from their own pocket and avoid the hassle of paying high insurance premiums.
- Awareness of potential financial risks
By opting for self-insurance, companies get fully aware of their financial risks based on the financial analysis of the past and potential future events. In this way, they know exactly how much to save for future risks.
- Long-term coverage
Self-insurance enables companies to save money in the long run. The administrative staff is conditioned and trained in such a way that they can fully manage the financial cash flows and spare some in between to meet any future claims and losses. On the other hand, traditional insurance only lasts for a year, after which it has to renew every time.
Disadvantages of self-insurance
Every good strategy poses some disadvantages and risks as well. Every plan is not 100% foolproof, but if you calculate your risks and advantages in an accurate way, then you can minimize any disadvantages of a strategy.
- Vulnerability
The potential risk involved with self-insurance is that the company becomes vulnerable to its savings. If a company does not plan and prepare for the level of risks involved then it may completely drain all of its savings to cover any accidents and losses.
- Cost of administrative services
Just putting aside a huge amount to cover losses is not enough; a company needs to hire appropriate staff who can analyze any risks and losses. The cost of hiring and managing an administrative team adds to the cost of self-insurance.
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