Insurance costs are high. There’s no getting around it. Operating a business is a hit or miss proposition anyway, and when you add the ever increasing cost of business insurance, a lot of small companies can’t keep up. They are looking for relief, and some are turning to self-insurance. Following are a few tips on how to self-insure your business.
What Does It Mean to Self-Insure?
Basically it means you’ll be handling any financial problems that come up by yourself, without paying premiums from an insurance company. If you decide to provide a health insurance plan for your employees, you would collect a certain amount of money from them and deposit the cash into a fund designated for that purpose. When a claim is filed, any payout would come from that fund.
How the Plan Works
The usual way a self-insurance plan works is for the employer to open a fund that will be reserved for insurance claims purposes. They will generally hire someone to manage the fund. The fund manager is paid to administer the account. They will be responsible for handling the money and making payouts when they’re deemed appropriate. Because you’re essentially cutting out the middle man, i.e. the insurance company, the cost of being self-insured can be minimized. This can result in saving a bit of money, which can be put back into operating the business. In order to protect the worker, most states require the employer to post a bond to cover potential problems.
When you self-insure your business, you’re literally taking responsibility for the welfare of your employees. Virtually any type of business insurance can be covered by self-insuring–health, vehicles, property or workers’ comp can all be self-insured. The most prevalent among businesses that self-insure is health coverage. As long as you have a designated fund, self-insuring is possible. The extent of coverage is left up to you, since you’re the insurer.
There is risk involved in anything you do, including buying insurance the traditional way. No matter how well established or trustworthy an insurance company may seem, there is always the chance they won’t live up to expectations. So the fact that you’ll be taking a chance by self-insuring won’t be anything new. One of the chief drawbacks to self-insuring is the risk of having too many claims filed within a short period of time, or one huge claim that has to be paid out, thereby draining the fund. Even if you’ve been extremely careful, and thoroughly researched the self-insurance process beforehand, you can’t predict the future. There is always the possibility of that one enormous claim, or too many claims coming too fast.
Insurance for the Self-Insured
If the worst happens and your fund is in danger of becoming depleted, there are ways of bailing yourself out. A very specialized type of insurance, called stop-loss insurance is available. A company that is self-insured knows there is a limit to how much they can pay out before the fund dries up, so they will often buy a stop-loss policy from a traditional insurance company. These policies kick in when the self-insurance fund is in danger. They work two ways.
One way is for the stop-loss policy to take over once an individual claim reaches a predetermined point. This will ensure that enough money remains in the company’s insurance fund to continue to pay other claims. The stop-loss policy will continue to pay the original claim up to the limit set on the policy.
The other way a stop-loss policy works is for it to take effect if numerous claims have been filed against your self-insurance fund. When those claims reach a certain number, the stop-loss policy takes over. It remains in effect until the amount of money needed to pay those claims is reduced to a prearranged amount.
Bailey Harris is a freelance writer. Bailey writes regularly on insurance, finance, and related topics.