Advantages and Disadvantages of Self-Insured Business
Every business needs some type of insurance. For businesses with low risk, paying premiums isn’t worth it when claims are not made. A self-insured business can assure coverage for its employees and any business losses without having to pay insurance premiums.
What is Self-Insurance?
Self-insurance is an insurance plan where an employer takes on all the financial risks involved with insurance policies. Employers who self-insure pay out-of-pocket as claims occur or damages need repairs.
Self-Insurance VS. Traditional Insurance
Employers who self-insure set up a trust or other similar account where the money is set aside for claims.
These employers use third-party administrators (TPAs) to manage and process claims. Those who choose to go with traditional insurance plans manage claims through their insurance agency.
Employers with traditional insurance pay a pre-determined premium to an insurance carrier to guarantee coverage.
Advantages of Self-Insured Business
The biggest advantage of self-insurance for both small and large organizations is the ability to reduce the cost of insurance. With traditional insurance, premiums increase as insurance carriers need to cover costs like staffing and administration. By self-insuring, businesses protect themselves from increasing premiums and pay only what’s necessary.
Self-insurance is beneficial to businesses because it makes them more aware of their risks. Businesses must analyze their risks and how much money to save based on past and future analyses of risk.
Another advantage of self-insurance is the ability to manage risk in the long term. A self-insured business saves money for years leading up to having to pay out while with traditional insurance, it’s common for policies to last one year.
Disadvantages of Self-Insured Business
The biggest disadvantage companies face with self-insurance is not understanding their exposure to risk. When a company doesn’t prepare and save for their level of risk, the companies self-insurance isn’t able to cover the proper amount for accidents.
Another disadvantage to self-insurance companies need to be aware of is the cost of administration to manage self-insurance. Setting money aside in a separate account isn’t enough. Self-insured businesses need to make sure they have a team in place to analyze risk and handle claims.
Additional Considerations
Employers who choose to self-insure their companies need to investigate added coverage options. This holds for small businesses.
Employers who self-insure may qualify for stop-loss insurance. These policies protect against outrageous claims. Stop-loss policies refund employers for claims that go past the dollar amount specified in the policy.
When it comes to self-insurance, employers need to consider they often are not covered in the company’s workers’ compensation plans. This is because they’re the ones paying for these claims.
There are many risks involved with self-insurance. Because of these risks, this type of coverage is common among large companies. Although there are many risks, self-insurance is beneficial for both small and large companies because of the money saved by not paying insurance premiums.
To decide if self-insurance is right for a company, employers need to weigh the cost of insurance premiums against the possibility of expensive claims or losses.
Simplify Self-Insured Business
With SmartCompliance, self-insureds can issue one-off certificates of insurance (COIs) and automate the renewal process. Schedule a free demo to see how SmartCompliance can help self-insured businesses.
