We investigate the viability of self-insurance, what it is and how it could work for individuals, but ultimately why businesses should be wary of the dangers of being self-insured. Self-insurance goes against the purpose of insurance, to successfully defend against potential calamity – So why are people considering self-insurance and what’s the correct decision for your business?
What is self-insurance?
Put simply, self-insurance is the act of saving money to insure against any potential losses in the future.
The idea behind being self-insured is to save the would-be policyholder money, which they can reinvest in themselves.
Why are more people considering self-insurance?
The cost of living crisis has tightened peoples’ purses, and in an effort to save money individuals are finding ways to cut costs. Insurance is to some, an optional expenses and therefore can be done away with. Instead they wish to pay into a savings pot, using it to pay for incidents and not make the usual insurance claims.
According to a survey of 1,025 people in August of this year, 9% had cancelled an insurance policy. Over the same period, 8% reduced cover and 6% considered cancelling.
Does self-insurance work?
The successfulness of being self-insured depends upon both the severity and frequency of claims. Its validity as an alternative to insurance can be calculated and assessed.
WHICH? found that dental cover mostly leaves policyholders out of pocket in comparison with self-insurers, however this ignored inflation and was measured over the course of 10 years. The results occurred because dental payouts are limited, often only covering 50% of treatment.
Individuals surveyed, holders many types of insurance, typically said they had not claimed more than three times over the last decade; essentially not utilising their insurance for ten years. Owners of breakdown cover, emergency cover, boiler cover, private health insurance, dental insurance, pet insurance, phone cover, and gadget cover, may have seen savings if they had instead chosen to self-insure as they most likely did not make significant claims.
The benefit of self-insurance
For smaller covers, it could result in savings, and with the cost of living being so strenuous, the accumulative savings may be necessary. By reducing claims and premium costs, self-insuring can improve a company’s profits. Self-insurance also provides a pot of money to cover anything and everything, whereas policyholders will see limits and exclusions. Self insurance is far more flexible, whereas insurance policies can only provide coverage against certain risks.
Settlements will generally be a lot quicker, as will the cash flow, as fewer funds are required to arrange a settlement. Overall, self-insurance is viable for businesses where losses are unpredictable and for covering risks which are not fully covered by insurance. However the dangers are overwhelming.
The dangers of self-insurance
Self-insurance cannot cover against significant losses, which on the most part, is the main purpose of insurance – to protect against catastrophe.
As a policyholder, you are protected by the far deeper pockets of insurance companies rather than your own savings pot. Insurance payouts can be far higher than any realistic amount you are able to save.
Misunderstanding a business’s exposure to risk is one of the most dangerous aspects of self-insurance. 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. Having a broker on side, an experienced eye who knows how much risks are worth, ensures businesses are not left underestimating risks.
Wise policyholders will heavily benefit from the experience of brokers and insurers. Their invaluable advice will help to identify and manage risks, initially reducing your likelihood of an incident.
A great deal of time and vigilance is demanded by self-insurance. Self-insured companies would need to ensure the program will be properly manged and accounted-for, whereas policyholders easily outsource this. Businesses most likely will have to hire a dedicated team to analyse risk and handle claims, perhaps an unexpected cost.
Talk to your broker
If you, as a business or private high-value individual, are truly considering self-insurance, we greatly recommend you discuss this with your broker. Brokers are on your side, looking out for your interests, and will help you weight up the benefits and dangers of being self-insured. They have more insight it reasons behind self-insurance, have experience in self-insured projects, and help provide advice on if it’s the right path for you and your business.
At Romero Insurance Brokers, our team are dedicated o you, your needs and the needs of your business. Our motto is Treating Customers Exceptionally, and we will always be honest with you. Self-insurance, being the hot topic it is, is a huge decision for both businesses and brokers, and no-one is better to discuss it with than our expert team
If your reasons for considering self-insurance include:
- Premiums too high
- Not receiving full coverage
- Limited policies
…then talk to your broker, as brokers have process to help with these issues.
HOW INFLATION INCREASES RISK OF UNDERINSURANCE
Rising inflation is impacting prices across all sectors, including insurance.
Costs included in a claim, such as replacement materials and labour, will in future be much higher than expected. This leaves commercial businesses at the possibility of underinsurance.
Learn about the risks of inflation and how it could have a significant impact on policyholders.Learn More