Definition of 'Self Insure'
As businesses struggle to cope with skyrocketing insurance costs, many are looking at ways to self-insure. While self-insuring may not be right for everyone, in some cases it can help a business save money.
What it means to self-insure
To self-insure means to assume the risk for a potential loss rather than purchase insurance. For example, when a business chooses to self-insure its employee health plan, it collects the plan premiums from the employees and keeps the money in a fund from which it pays claims.
How it works
In a self-insured plan, the employer typically hires a third party to manage the plan and process the claims. For this service, the third party gets an administrative fee. Because the plan is not designed to make a profit for an insurance carrier, the costs of operating the plan can be less than that of standard insurance. States generally require employers who self-insure to post some sort of bond to cover potential claims.
What can be self-insured?
Areas that typically can be self-insured include property, vehicles, employee health plans and workers' compensation plans. Nearly any insurable risk can be self-insured.
When to self-insure
Self-insuring generally works best with a large group of participants. That way, if one of the participants has a large claim the cost can be easily spread among the entire group. Also, the larger the group, the easier it becomes to predict future claims.
The drawbacks
Although the employer can predict some of the risks and adjust premiums accordingly, several large claims can easily wipe out a self-insurance fund. For example, if an unusually large number of people in a self-insured health plan develop cancer, the resulting claims could deplete the fund and leave it without enough money to pay other claims. For that reason, many self-insurers purchase "stop loss insurance." Once claims reach a certain level, the stop loss insurer would pay the claims over that level.
