4 - Self-Insurance Plans

Advantages of self-insurance plans

-control over claims -loss control -long-term cost savings -cash flow benefits

Requirements of a self-insurance plan

-self-insuring a type of loss that is predictable -having sufficient financial resources and risk tolerance to retain potentially significant losses -having the organization willing to commit capital and resources to administer a self-insured plan -having the organization embrace loss control as part of its corporate culture

Disadvantages of Self-Insurance Plans

-uncertainty of retained los outcomes -administrative requirements -deferral of tax deductions -contractual requirements

Earnings smoothing

An understatement in loss reserves results in an overstatement of net income, therefore an unethical organization could manipulate its loss reserve amounts in order to minimize the volatility of its financial results over time

Litigation management

involves controlling the cost of legal expenses for claims that are litigated

Incurred but not reported (IBNR) losses

losses that have occurred but not yet been reported to the insurer by the insured, producer, or any other party

Loss reserve must be established if these 2 conditions are met according to GAAP (Generally accepted accounting principles)

the loss occurred before the date of the financial statements, and the amount that will be paid on the loss can be reasonably estimated

Risk Criteria

this is information used as a basis for measuring the significance of a risk

Purpose of a self-insurance plan

to enable an organization to lower its long-term cost of risk by allowing it to pay for its own losses without incurring the transaction costs associated with insurance

Self-Insured Healthcare Benefits

Since the passage of the Employee Retirement Income Security Act (ERISA), organizations have been allowed to self-insure healthcare benefits instead of purchasing healthcare insurance. Self-insured health plans (also called employer-based health plans) are the means through which over 50 million US employees receive healthcare benefits. As with self-insurance plans for property-casualty loss exposures, self-insured healthcare plans are formal retention plans designed to fund and administer healthcare benefits. Most self-insured healthcare benefit plans require employees to contribute funds to offset the plan's cost. These plans also involve using a third-party administrator and purchasing excess insurance

Self-insurance

a form of retention under which an organization records its losses and maintains a formal system to pay for them

Group self-insurance plan

a group of employers in the same industry that jointly (as a whole) and severally (individually) guarantee payment of workers compensation benefits to the employees of the group's members. A not-for-profit association or corporation is typically formed to which they pay premiums for self-insurance purposes. Examples: workers compensation and healthcare benefits

individual self-insurance plan

a retention that involves only one organization. Examples: workers compensation, auto liability, general liability, auto physical damage, professional liability, earthquake, flood, healthcare benefits

Informal Retention

a type of retention in which an organization pays for losses with its cash flow and/or current assets and generally keeps no record of losses

Risk charge

an amount over and above the expected loss component of the premium to compensate the insurer for taking the risk that losses may be higher than expected

Third-party administrator (TPA)

an organization that provides administrative services associated with risk financing and insurance