Self Insurance
Self Insurance (or self funding as it is also referred to) is an alternative risk financing strategy used by thousands of employers across the country to finance their group health care and workers’ compensation liabilities.
Self Insurance has become an increasingly attractive option for many employers due to the rising costs associated with health care and workers’ compensation commercial insurance.
Benefits of self-insurance:
- More direct employer-employee relationships in workers compensation matters
- Promotion of competitive advantage by allowing an organisation more control over its workers compensation related finances
- Enhancement of scheme-wide best practice philosophies by encouraging high-level self-insurer performance
To be eligible for Self Insurance you must satisfy the prescribed minimum requirements as to financial strength and viability. That is, it must demonstrate that you as an organisation would be capable of meeting its claims liabilities as and when they fall due.
Information regarding the way eligibility is determined is contained on the web site of the Authority.
Organisations must be assessed by the Authority in such areas as occupational health & safety, claims experience, claims management, occupational rehabilitation and financial viability.
The Authority may approve a body corporate as a self-insurer if it is satisfied that the body corporate is fit and proper to be a self-insurer.
Initial approval to self-insure is given for a period of three years and thereafter for four years.
To continue as a self-insurer an organisation must apply for re-approval at appropriate times. Such applications are subsequently assessed similarly to the initial application.
After commencement you are required to provide & adhere to the following:
- A bank guarantee for actuarially assessed liabilities
- Participation in annual self audit program (this is a term & condition of self insurance)
- Quarterly contribution (including GST) to VWA Fund
- Contract of insurance in respect of contingent liabilities for an unlimited amount
- No other re-insurance (of risk) is allowed; risk is retained
- Annual certification of remuneration
Australian Risk Services are experts in assisting organisations through the self-insurance process. We provide organisations with the resources to meet their OHS and claims and rehabilitation management audit requirements under self-insurance as well as your on-going audit requirements.
Self Insurance Auditing Services
With the growth of risk management and the increased emphasis on finding the most appropriate technique for dealing with risk, alternatives to commercial insurance and to the traditional forms of retention have developed. These include self-insurance programs, captive insurers, risk-retention groups, and risk-sharing pools.
The term Self Insurance has become a well established part of the terminology of the insurance field, despite disagreement as to whether or not such a mechanism is possible. From a purely semantic point of view, the term Self Insurance represents a definitional impossibility. The insurance mechanism consists of transfer of risk or pooling of exposure units, and since one cannot pool with or transfer to himself or herself, it can be argued that Self Insurance is impossible. However, the term is widely used, and we ought therefore to establish an acceptable operational definition, semantically incorrect through it may be.
Under some circumstances though, it is possible for a business firm or other organisation to engage in the same types of activities as a commercial insurer dealing with its own risks. When these activities involve the operation of the law of large numbers and predictions regarding future losses, they are commonly referred to as “Self Insurance”.
If you’re considering Self Insurance, it’s advisable to employ a company who are specialists in Self Insurance auditing to make sure you can cover the costs of an accident or unforeseeable event. Australia Risk Services offer these as part of our suite of Property Risk Assessment services.
When considering the costs of insuring your company, it also pays to have a public liability risk assessment. With our Self Insurance auditing services, we can assess which public liability risks your workplace has and how to reduce their impact – both on the public and your wallet.
To be operationally dependable, such programs must possess the following characteristics:
- The organisation should be big enough to permit the combination of a sufficiently large number of exposure units so as to make losses predictable. The program must be based on the operation of the law of large numbers
- The plan must be financially dependable. In most cases, this will require the accumulation of funds to meet losses that occur, with a sufficient accumulation to safeguard against unexpected deviation from predicted losses
- The individual units exposed to loss must be distributed geographically in such a manner as to prevent a catastrophe. A loss affecting enough units to result in severe financial loss should be impossible
Even apart from its semantic shortcomings, self-insurance is an overworked term. Few companies of organisations are large enough to engage in a sound program meeting the requirements outlined above. In the majority of cases, risks are simply retained without attempting to make estimates of future losses. In many cases, no fund is maintained to pay the losses. Furthermore, until the fund reaches the size where it is adequate to pay the largest loss possible, the possibility of loss is not eliminated for the individual exposure units.
As we have noted above that while Self Insurance is technically a definitional impossibility, the term has found widespread acceptance in the business world. Self Insurance programs are distinguished from other retention programs primarily in the formality of the arrangement. In some instances this means conducting a self-insurance audit and obtaining approval from a regulatory agency to retain risks, under specifically defined conditions. In other cases, it means the formal trappings of an insurance program, including funding measures based on actuarial calculations and the contractual definitions of exposures are self-insured. When the self-insurance involves third parties as in the case of employees covered under an employer-sponsored health insurance program, there is a need for the formal trappings of insurance, such as certificates of coverage and premiums.
Over the past three decades, the use of Self Insurance by business and other organisations in dealing with risk has grown significantly. In some areas, such as employer-sponsored health benefits for employees, it has become a major alternative to commercial insurance. Given the growing importance of this approach to dealing with risks, it seems appropriate that we consider some of the reasons for its growth. Contact Australian Risk Services for the most accurate self insurance audits Australia wide.
Reasons for Self Insurance
Self Insurance – like any other risk management techniques – should be used when it is the most effective technique for dealing with a particular risk. The question is, under what circumstances is self-insurance the most effective technique for dealing with a particular risk? The main reason that firms elect to self-insure certain exposures is that they believe it will be cheaper to do so in the long run. This is particularly true in cases in which there is no need for the financial protection furnished by insurance. When losses are reasonably predictable, with a small likelihood of deviation from year to year, the risk can be retained.
- First, as explained earlier, the cost of insurance must, over the long run, exceed average losses. This is a mathematical truism. In addition to the losses that must be paid, the insurance premium must include a surcharge to cover the cost of operating the insurance company & its distribution system. In addition, commercial insurance subject to taxes, which represent a cost that must be paid by buyers. Self Insurance avoids certain expenses associated with traditional insurance market. These include, among others, insurer overhead & profit, agents’ commissions, & the premium taxes paid by insurers.
- The organisation may believe that its loss experience is significantly better than the average experience upon which rates are made, or that the rating system does not accurately reflect the hazards associated with the exposure.
- In lines of insurance in which there are long delays between the time that a loss occurs & the time It is paid, insurers hold “reserves”, which represent liabilities for unpaid losses. Some organisations believe that the investment income from these reserves is not adequately reflected in rates, & that they can reduce the cost of their insurance by capturing these intestable funds through self-insurance.
- Self Insurances can avoid the social load in insurance rates that results from statuary mandates that insurers cover certain exposure in which premiums are less than the losses for those insured. These underwriting losses are passed on to other insureds in the form of higher premiums than their hazards justify.
Self Insurance has become an increasingly attractive option for many employers due to the rising costs associated with health care and workers’ compensation commercial insurance.
Benefits of Self Insurance
- More direct employer-employee relationships in workers compensation matters
- Promotion of competitive advantage by allowing an organisation more control over its workers compensation related finances
- Enhancement of scheme-wide best practice philosophies by encouraging high-level self-insurer performance
Initial approval to self-insure is given for a period of three years and thereafter for four years.
To continue as a self-insurer an organisation must apply for re-approval at appropriate times. Such applications are subsequently assessed similarly to the initial application.
After commencement you are required to provide and adhere to the following:
- A bank guarantee for actuarially assessed liabilities
- Participation in annual self audit program(this is a term & condition of self insurance)
- Quarterly contribution (including GST) to VWA Fund
- Contract of insurance in respect of contingent liabilities for an unlimited amount
- No other re-insurance (of risk) is allowed; risk is retained
- Annual certification of remuneration
Australian Risk Services are experts in assisting organisations through the Self Insurance process. We provide organisations with the resources to meet their OHS and claims and rehabilitation management audit requirements under Self Insurance as well as your on-going audit requirements.
We have the technical expertise to assist you in building appropriate Management Systems to meet the requirements of SafetyMap and InjuryMap.
Disadvantages of Self Insurance
Offsetting the perceived advantages of Self Insurance, there are certain disadvantages:
- The greatest disadvantage of Self Insurance is that it can leave the organisation exposed to catastrophic loss. This disadvantage can be eliminated if the self-insurer purchases reinsurance for potentially catastrophic losses, much in the same way as do insurers
- Another disadvantage of a Self Insurance program is that there way be greater variation of costs from year to year. When the variation in costs from year to year is great, the firm may lose the tax deduction for the losses that occur in years when there are no profits from which to deduct the losses
- Self Insurance of some exposures can create adverse employee and public relations. There may be advantages to the organisation in having its claims handled by an insurer
- Loss of ancillary services. There are certain services provided by insurers that are lost when a company adopts a Self Insurance program. Most of these relate to loss prevention and claims handling. These services can be purchased separately from an insurer or from specialty firms. The cost of obtaining these services must be included in the cost of the Self Insurance when a comparison is made with commercial insurance
As Self Insurance became more popular among large corporations, insurers developed loss-sensitive rating programs and retention programs to compete with Self Insurance. These include programs with large deductibles, experience rating and cash-flow plans, in which the premiums payment arrangement allows the insured to retain premiums for investment until the funds are required for payment of losses.
Current Self-insurers: based on remuneration self-insurers represent approximately 10% of all WorkCover employers.
- Alcoa of Australia Limited
- Amcor Limited
- ANZ Banking Group LTD
- Bank of Melbourne (a division of Westpac Banking Corporation)
- BP Australia Holdings Limited
- BHP Billiton Limited
- Brambles Industries Limited
- Bristile Limited
- Cadbury Schweppes Australia Limited
- Carter Holt Harvey Australia Limited
- Coles Myer LTD
- Commonwealth Bank of Australia
- CSR Limited
- Effem Foods Pty LTD
- ExxonMobil Australia Pty LTD
- Ford Motor Company
- Goodman Fielder Limited
- Hanson Australia (Holdings) Pty LTD
- Inghams Enterprises Pty LTD
- Kaal Australia Pty Limited
- Kodak (Australasia) Pty LTD
- Kraft Foods (Aust) Limited
- Mayne Nickless Limited
- Melbourne Water Corporation
- National Australia Bank Limited
- OneSteel Pty LTD
- PaperlinX Limited
- Philip Morris Australia Limited
- Publishing & Broadcasting Limited
- Qantas Airways Limited
- Royal Automobile Club of Victoria (RACV) Limited
- Shell Australia LTD
- Unilever Australia (Holdings) Pty LTD
- The University of Melbourne
- Woolworths Limited
- Safety Video Production
- Corporate Governance Services
- Property Risk Assessment
- Event Risk Management, Safety, & Security
- Self Insurance
- Safety Behavioral Culture Survey
- Strategic Risk Management
- Quality Management Services
- High Level Risk Profiling
- Process Re-engineering