Purchasing insurance is one of the most popular methods of mitigating business risks, however, some businesses choose to self-insure instead. Here are some of the most important factors to consider when deciding whether self-insurance is right for your business.
Amount of Risk
Sell-insuring can come with a higher level of risk. You will need to set aside enough funds to pay potential losses, comply with the law, and handle all the administrative and legal functions involved with settling claims. Group captives can mitigate some of the risk associated with self-insurance by sharing that risk with other businesses.
Self-insuring can provide a greater degree of control than traditional insurance. You may determine which risks to focus on, how much money to set aside to pay losses and how you choose to handle the claims process, subject to the laws in your area.
Self-insurance can be more customizable to meet your needs than traditional insurance. This can be a particularly important factor to consider if your business has unique needs that may not be addressed by typical insurance policies.
The primary benefit of traditional insurance is that the effect on your cash flow is easier to predict. Your premium payments will be known. You can estimate what your cost for deductibles and coinsurance will be based on claims history. However, there is still the risk that you may incur losses not covered by your policy or that exceed your policy limits.
With self-insurance, you won’t have the guaranteed expense of premium payments, but you also have less predictability in what you may have to pay out since you may be responsible for paying all of your losses yourself, instead of just the ones not entirely covered by your policy.
Self-insurance can be a valuable tool for risk management for many companies. By determining the costs and benefits of self-insurance and traditional insurance, you can make an informed choice based on the unique needs of your business.