Insurance is both an obligation and an option for most business owners. If you have employees, you most likely have a legal obligation to carry worker's compensation insurance. Group health insurance, however, is a benefit you may or may not choose to provide. If an analysis of the cost of commercial worker's compensation insurance plans leaves you searching for alternatives, or if the cost of group health insurance causes you to reconsider continuing this benefit, self insurance may provide an answer.
Identification
Self insurance is your own insurance policy. Rather than pay monthly premiums on a commercial insurance policy, you set up and fund a trust account to cover insurance claims. Both types of plans are under government regulation with state laws covering self-insured worker's compensation plans and the federal laws covering self-insured health plans via provisions in the Employee Retirement Income Security Act.
Requirements
To set up a self insurance plan, you must have the financial resources to do so. In the case of worker's compensation, your state determines specific financial requirements, and the application process may include an analysis of your claims history, business finances, knowledge level and whether you provide additional guarantees such as a surety bond or excess insurance. In the case of self health insurance, you usually determine financial requirements with the assistance of a risk assessment expert called an actuary. Actuaries consider your business and your employees, calculate the likelihood of certain outcomes occurring and determine the amount of financial risk you must assume.
Types
Self insurance can be one of two types. You can fund the plan on your own and assume full financial responsibility for all claims, or you can incorporate an additional insurance policy to handle large or catastrophic claims. In the case of worker's compensation, this involves a policy called excess worker's compensation insurance and may be part of eligibility requirements. With self health insurance, this involves adding a stop loss insurance policy. In either case, the additional policy protects you from unlimited financial loss, as it handles all claims over a specific dollar amount and helps you budget trust-account money.
Considerations
Although how you choose to allocate funds in a self insurance plan trust account is up to you, the level of risk each investment presents is an important consideration. Instead of thinking of self insurance investments as a way to make money, investments should be evaluated from a safety and liquidity standpoint. Cash equivalent investments such as a high-yield savings account or certificates of deposit (CDs) are options that may not provide as large a return but are safe and easily accessible.
