With the growth of risk management and the
increased emphasis on finding the most appropriate technique for dealing with
risk, alternatives to commercial insurance and to the traditional forms of
retention have developed. These include self-insurance programs, captive
insurers, risk-retention groups, and risk-sharing pools.
The term self-insurance has
become a well established part of the terminology of the insurance field,
despite disagreement as to whether or not such a mechanism is possible. From a
purely semantic point of view, the term self-insurance represents a
definitional impossibility. The insurance mechanism consists of transfer of
risk or pooling of exposure units, and since one cannot pool with or transfer
to himself or herself, it can be argued that self-insurance is impossible.
However, the term is widely used, and we ought therefore to establish an
acceptable operational definition, semantically incorrect through it may be.
Under some circumstances
though, it is possible for a business firm or other organisation to engage in
the same types of activities as a commercial insurer dealing with its own
risks. When these activities involve the operation of the law of large numbers
and predictions regarding future losses, they are commonly referred to as
“self-insurance”.
If you’re considering
self-insurance, it’s advisable to employ an company who are specialists in
self-insurance auditing to make sure you can cover the costs of an accident or
unforeseeable event. Australia Risk Services offer these as part of our suite
of property risk assessment services.
When considering the costs of
insuring your company, it also pays to have a public liability risk assessment.
With our self-insurance auditing services, we can assess which public liability
risks your workplace has and how to reduce their impact – both on the public
and your wallet.
To
be operationally dependable, such programs must possess the following
characteristics:
The
organisation should be big enough to permit the combination of a sufficiently
large number of exposure units so as to make losses predictable. The program
must be based on the operation of the law of large numbers.
The
plan must be financially dependable. In most cases, this will require the
accumulation of funds to meet losses that occur, with a sufficient accumulation
to safeguard against unexpected deviation from predicted losses.
The
individual units exposed to loss must be distributed geographically in such a
manner as to prevent a catastrophe. A loss affecting enough units to result in
severe financial loss should be impossible.
Even apart from its semantic
shortcomings, self-insurance is an overworked term. Few companies of organisations
are large enough to engage in a sound program meeting the requirements outlined
above. In the majority of cases, risks are simply retained without attempting
to make estimates of future losses. In many cases, no fund is maintained to pay
the losses. Furthermore, until the fund reaches the size where it is adequate
to pay the largest loss possible, the possibility of loss is not eliminated for
the individual exposure units.
As we have noted above that
while self-insurance is technically a definitional impossibility, the term has
found widespread acceptance in the business world. Self-insurance programs are
distinguished from other retention programs primarily in the formality of the
arrangement. In some instances this means conducting a self-insurance audit and
obtaining approval from a regulatory agency to retain risks, under specifically
defined conditions. In other case, it means the formal trappings of an
insurance program, including funding measures based on actuarial calculations
and the contractual definitions of exposures are self-insured. When the
self-insurance involves third parties as in the case of employees covered under
an employer-sponsored health insurance program, there is a need for the formal
trappings of insurance, such as certificates of coverage and premiums.
Over the past three decades,
the use of self-insurance by business and other organisations in dealing with
risk has grown significantly. In some areas, such as employer-sponsored health
benefits for employees, it has become a major alternative to commercial
insurance. Given the growing importance of this approach to dealing with risks,
it seems appropriate that we consider some of the reasons for its growth.
Contact Australian Risk Services for the most accurate self insurance audits
Australia wide.
