There is another way to purchase insurance for businesses: self-insurance.
Self-insurance is best looked upon as a high excess (deductible) insurance programme where you purchase a non-standard insurance policy and manage claims by setting aside a pre-agreed amount of money to pay for potential losses.
This can be a good option for any business that is looking to take control of their own insurance needs and cashflow.
What is self-insurance?
By electing to self-insure a pre-agreed amount per claim, you can set aside funds on your P&L to cover the expected & unexpected losses rather than using an insurance company to manage everything.
The main benefit of self-insuring is an improvement in cashflow, as claims take time to settle, and reduced insurance premiums (as you are taking a larger part of the loss per claim).
What type of insurance does self-insurance cover?
Self-insurance can apply to the following insurance policies:
- Employers’ Liability
- Public Liability
- Business Interruption
- Niche specialist covers
The UK requires all fleet operators to have a minimum level of cover with a registered insurance company as stipulated by the Road Traffic Act, but you may be able to explore self-insurance for your motor fleet.
Increasing your excess is the first step to a practical self-insurance motor policy. Managing the claims is organised by a selected claims management company, and a fund in a joint ESCROW account is lodged with the insurer.
Once claims are settled, then funds are used from this account and a provision is kept each year for any outstanding claims. Once the year is closed off by an auditor then the remaining funds are released to you.
There is also the advantage of reduced premiums as your insurer is only used for catastrophic events – for example over £100,000 each claim.
Some lenders will require a commercial property to have standard insurance cover in place. However, if you own your property outright and have a large portfolio, then establishing a self-insurance programme could be beneficial.
This option works best if you already have a significant portfolio and only require cover if a building is destroyed.
If you self-insure, you should also take into consideration the costs associated with causing damage to someone’s belongings or someone being injured on your property. These costs could include medical bills, legal fees and the repair or replacement cost of damaged items.
Liability insurance claims can take 5 years or more to settle or close. Rather than be penalised for these estimate claims that could be closed at nil in 5 years, many businesses elect to have a self-insurance programme in place.
If you had 10 £25,000 claim estimates, insurers would seek year-on-year to increase premiums as they look at the potential claims exposure. A self-insurance policy removes these claims from the insurer and transfers the risk to your own P&L. Effective risk management and health & safety procedures enables you to reduce the risk of claims.
Advantages and disadvantages of self-insurance
Generally, a self-insurance plan is best for those with a large pool of readily available assets and minimal risk.
As with other most financial decisions, self-insurance has advantages and disadvantages.
Advantages of self-insurance
The main perks of self-insurance include:
- No policy limits: When you self-insure, you can design the limits of the policy – some may not be available in the traditional marketplace.
- Flexible fund usage: By self-insuring, you get to decide how your funds are used after a loss, giving you full flexibility to recover in the way you think is best.
- Potential for savings: Self-insurance can seem exciting because it gives you the opportunity to improve cashflow, without having an insurance premium tax to pay. For every £500,000 premium, this would save 12% (£60,000) alone.
Disadvantages of self-insurance
Self-insurance comes with some notable drawbacks, including:
- Planning challenges: A self-insurance programme requires a detailed plan. The most successful self-insurance programmes are those that regularly put aside funds into a dedicated self-insurance account and invest heavily in risk management/prevention.
- Potential for large out-of-pocket expenses: While self-insurance may give you the opportunity to reduce premiums, you should be aware that losses can escalate quickly, sometimes costing tens of thousands of pounds or more. Without the correct structure and process you could be facing a difficult financial position.
Self-insurance, like many financial decisions, is multifaceted. While it may be a good decision for some, it likely does not fit all scenarios. If you are unsure if self-insurance is right for you, talking to the team at Self-insurance Protect may be beneficial.
There are a lot of factors to consider when looking at self-insurance against a traditional insurance policy. We have the experience and facilities to walk you through an example model of how this would work for you.
Why not contact us for a free consultation today?
Any questions? Please don’t hesitate to contact one of our team.
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