Should You Self-Insure? You Already Are - August 15th 2018

At Strategiq Risk Management we help companies and organizations manage the risks covered – and not covered – by their property and liability insurance plan, and to do so in the most cost effective way. Your insurance broker has worked with you to design a great plan, but there is much that your policy does not cover. This topic does not receive much attention, but managers ignore this area at their peril. It really is time for a closer look.

Property and casualty insurance is…what exactly? As a seasoned business owner or manager, by now you know this almost intuitively: P&C insurance is a contract that transfers a defined set of risks (yours) to a third party (the insurer) for a fixed price (the premium). However to be more precise, insurance policies don’t actually transfer risk, i.e. purchasing fire insurance will not reduce your odds of having a fire. What gets transferred to the insurer is the risk of financial loss caused by the fire. But I digress. The point I wish to make is that insurance contracts only cover the risks described in the policy, and no insurance policy is so comprehensive that it covers every conceivable risk. So who’s shouldering all the risks not listed within the policy? You are. Congratulations, you’re an insurer, providing coverage for your own risks.

If you were to list every possible peril your organization may be exposed to over the course of a year, it would be a pretty dizzying list. And purchasing insurance to cover all of these is both unrealistic and unaffordable. Even the broadest of policies only covers a finite set of risks, and does so within the limits set out in the policy. All other risks are retained by you, and your organization bears the burden of covering any losses. Retained risk is a form of self-insurance, whether you are making the decision purposefully or trusting things to happenstance. Lots of examples: an act of vandalism causes $3,000 damage but your insurance deductible is $5,000; or you get sued for $6 million but have a liability limit of $5 million. We could go on all day. Happenstance is not a risk management strategy. Heck it might not even be a word.

Sometimes it’s worth stating the obvious. Any given risk is insured through an insurance policy or through self-insurance, but never both. The more you self-insure, the less you need to cover through your policy. And the less you insure through your policy, the lower the premium. Which of course makes sense: the insurance company is insuring a smaller set of risks, and you therefore save not only on the “bare” premium but also the related markups and profit margins, as well as the 20% broker’s commission on that portion. The worst thing you could do? Randomly reduce or drop some of the coverages from your policy in order to reduce the premium. The best thing you could do? Put together a thoughtful, carefully constructed self-insurance plan (with the help of a professional risk manager) that will save money without exposing your organization to additional risk. This is what we do here at Strategiq.

Your two take-aways:
1. Over the long term insurance is the most expensive way to finance risk.
2. Make self-insurance a thoughtful, strategic decision; not the unaddressed residual not picked up by your insurance policy.

Ninety percent of Fortune 1000 companies have a formal self-insurance program. Why? Because they know that over the long term, insurance is the most expensive way to finance risk. What’s less well known is that smaller organizations can also self-insure and save money in the process. In our next post we’ll discuss some entry level self-insurance strategies.