Anytime you make a major business decision, it’s a good idea to weigh the pros and cons, and switching over to self-insurance is a major business decision. The trends in insurance have changed in recent decades, especially in the area of healthcare, making self-insurance a viable option for small- and mid-sized companies as well as large corporations.
To that end, we’ll explain what self-insurance is, explain the trends in self-insurance, and review the pros and cons.
What Is Self-Insurance?
Just as it sounds, self-insurance is when an employer takes responsibility for its own business insurance needs in one or more areas instead of purchasing an insurance policy from an insurance carrier.
For example, many companies are finding they’re paying less out-of-pocket by paying their employees’ health insurance claims directly rather than submitting them to an insurance company. As another example, companies that have large fleets of vehicles may pay less overall by paying for accidents where their drivers are at-fault rather than purchasing a large commercial auto policy.
The trends in self-insurance will help clarify whether self-insurance is right for your business.
The Trends in Self-Insurance
Some things to monitor in the self-insurance arena are the cost of premiums, the cost of claims, and changes in the insurance landscape for a particular type of insurance.
Concerning insurance premiums, Insurance Business reports that commercial insurance premiums have been trending upward. Overall premiums for Q1 2023 showed an increase of 5.6% over the same quarter during the previous year. Commercial property and auto policies saw double-digit percentage increases from the previous quarter while workers’ compensation and directors and officers policies decreased from the previous quarter.
Health costs are also increasing. PwC’s Health Research Institute projects a 7% increase in medical costs for individual and group health insurers in 2024 which is an increase of 1% in 2023.
Some of the issues contributing to higher medical costs are:
Individuals are catching up on screenings and doctor visits now that the COVID risk is lower.
Individuals who delayed treatment during COVID may have higher medical costs as their illnesses may have worsened.
Individuals are more willing to seek mental health treatment as the stigma has lessened after COVID.
New treatments are being approved such as gene and cell therapy which can cost in the millions. (Forbes)
Until recently, only corporations with 5,000 or more employees considered administering health insurance and employee benefit plans. The rising medical costs and the focus on prevention and wellness have small- and mid-sized businesses evaluating whether self-insurance also makes sense for their companies.
Self-insuring any type of policy may save your company money, although making this choice can carry significant risks.
Responsibilities of Administering a Self-Insurance Plan
Administering a self-insurance plan comes with increased responsibilities for business owners. Many laws and regulations must be followed such as:
Contracting with a third-party administrator to administer claims
Paying employees’ medical bills as they occur
Setting up a trust fund that holds funds for paying claims
Purchasing stop-loss insurance to ensure adequate funds in the event of a catastrophe
As a business owner, you must consider the legal requirements of administering a self-insurance plan and ensure you’re fulfilling all the associated compliance responsibilities.
Sorting out the pros and cons can help you determine whether the reward is greater than the risk.
What Are the Pros of Self-Insuring Your Business?
Here’s a rundown of the benefits of self-insuring your business:
Ability to customize your plan
Increased data (claims costs, administration costs, etc.)
Accountability of healthcare providers
Ability to develop wellness programs to lower healthcare costs
Lower administrative costs
In an interview with INC. Magazine, MagnaCare CEO, Joseph Berardo Jr. says, “Savings can be in the range of 10 to 20 percent.”
What Are the Cons of Self-Insuring Your Business?
Here’s a snapshot of the cons of self-insuring your business:
High risk of costly claims
Requires a third-party administrator
Ensuring confidential information is secure
Takes 3-5 years to reap the benefits (may be difficult to maintain during a recession or economic downturn)
Making the Decision About Self-Insuring
The insurance trends, pros, and cons we’ve outlined here should give you a better understanding of whether self-insuring any part of your insurance needs is right for you. Ultimately, you have to try to predict the potential claim and administration costs against your current insurance costs for the type of insurance you’re evaluating.
While larger companies have the benefit of spreading their risks over a larger pool of employees, the insurance trends, along with your business demographics may indicate that self-insuring is the best choice for a smaller company.
My insurance career spans more than two decades and includes extensive work in group captives and construction, working with general contractors and subcontractors all over the State.
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Leap | Carpenter | Kemps Insurance Agency provides Commercial Business Insurance, Employee Benefits, Life and Health Insurance, and Personal Insurance to all of California, including Merced, Atwater, Los Banos, Mariposa, Madera, Fresno, Modesto, Turlock, and Stockton.
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