What is self-insurance and how can it benefit your business?
Insurance makes the world go round and most of the time it is a confidence inspiring safety net. Businesses require a range of insurance to protect themselves against the risks they face. Some insurance cover is compulsory, such as motor insurance under the Road Traffic Act 1988, or employer’s liability insurance under the Employer’s Liability (Compulsory Insurance) Act 1969. However, some cover is not compulsory. Even if it is compulsory, an element of self-insuring may be possible in some cases.
What is self-insurance?
The term self-insurance is commonly used to cover a range of risk management strategies whereby rather than purchasing full insurance cover for all the risks your business faces a business can decide to set aside its own funds to cover potential costs rather than purchasing a traditional insurance policy. A simple illustration might involve being uninsured for the first £100,000 of any one claim and thereby reducing your insurance premium.
How is it different to traditional insurance?
With traditional insurance policies your business will usually pass all of the risk to insurers rather than carry all or part of the risk yourself.
What are the pros and cons of self-insurance?
The main advantage of the self-insurance model is that it will restrain the cost of insurance premiums. The business will calculate the risk it faces and make sensible financial provision and then deal with any claims arising through its own systems and with the help of professional advisers when needed. Cost savings are usually then realised through reduced insurance premiums.
The main potential disadvantages of self-insuring arise if it is not carefully thought through and implemented. It can mean funds are tied up in reserves impacting on working capital, can expose businesses to catastrophic losses, requires expert knowledge to accurately risk assess and predict potential losses and can cause business to spend a considerable amount of time handling claims and dealing with legal matters. All of these issues can and often are managed effectively with appropriate advice. Normally catastrophic losses are not self-insured as they are unpredictable.
Trethowans work with a range of insurance companies as well as businesses that have self-insuring models in order to help them manage their claims. In our experience, self-insurance models are most commonly used by businesses that have large commercial motor fleets.
There are different levels to self-insurance and evaluating your appetite for risk forms part of the discussions when reviewing your insurance programme with a trusted advisor. This article is not intended to replace the specific advice you will need in order to assess the insurance requirements of your business but most insurance brokers will be happy to conduct a full review of your insurance requirements in order to advise you as to what will best suit your needs.
This article was written by Kelvin Farmaner, Partner and Head of Insurance and Regulatory at Trethowans Solicitors in collaboration with Nick Sharland and Charlotte Powney from Gallagher.
