Topic 4 - Self Insurance Plans
How are self insurance plans financed?
Funded or unfunded
What's unfunded self ins plan?
Losses paid out of liquid asset or CF
Steps in selecting a self ins plan?
Meeting the requirements, analyze advantages and disadvantages
Difference between self ins and normal ins regarding the tax treatment for the cost of risk?
Self ins: prem isn't needed, losses are not deductible until they are actually paid out. Ins premium is deductible regardless of when losses happen
What activities are involved in the administration of individual self ins?
funding, record keeping, claim settlement, loss reserves, litigation mgmt, regulatory filings, taxes & fees, excess liability insurance
Benefits of group self ins?
good for small org, savings (through economies of scale in adm, claims handling, purchase of xs liability)
Self ins is best for?
high freq low sev losses
Why self-ins plans usually coupled w/ excess liability ins?
limit accumulation of losses or severe losses
What type of losses is suitable for self ins and why?
long tail losses bc they can be budgeted and paid out over time
Difference between self-ins and informal retention?
self-ins has a system to record losses and pay for them, informal retention pays for losses but do not plan or keep record of them
What are the requirements for an org to choose a self ins plan? (4)
self-insuring a predictable loss, sufficient financial resources and risk tolerance, willingness to commit capital and resources, embrace loss control as a culture
What's funded self ins plan?
set aside internal funds as reserves, which is recorded as an asset on BS
How does tax deductibility work in self ins plans?
tax deduction is only allowed when losses are paid out, not when they are incurred (e.g. long tail claims)
Disadvantages of self ins plan? - 4
uncertainty of retained loss outcomes, adm requirements, deferral of tax deductions, contractual requirements
What coverages are group self ins for?
WC, health benefits
What is group self ins plans?
a group of ERs in the same industry that jointly or severally guarantee payments of WC benefits to EEs
How does group self ins work?
a not-for-profit association is formed to which members pay premiums for self ins purposes
What is individual self insurance plans?
a retention plan that involves only 1 org
What is the purpose of self-ins plans?
allow org to lower cost of risk by paying for its own losses, without incurring transaction costs
Self ins plans are suitable for what type of orgs?
committed to risk control, can tolerate risk retention, can devote resources
What are the advantages of self ins plan? - 4
control over claims, loss control, long-term cost savings, CF benefits