Chapter 4- Self Insurance Plans

Advantages of Self Insurance

1. Control over claims- direct control over claim settlement 2. Loss Control- claims can be minimized or eliminated through Loss control 3. Long term cost savings- Long run costs tend to be lower than the cost of risk transfer 4. Cash Flow benefit- cash flow generated by retained losses that are paid over a period of time

Informal Retention

A form of retention by which an organization pays for its losses with its cash flow and/or current (liquid) assets but does not anticipate losses and, consequently, does not involve formal payment procedures or methods for recording losses.

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. Can only be used for WC losses and healthcare benefits Benefits an organization that is too small to self insure it's losses on it's own

Individual Self Insurance Plan

A retention plan that involves only one organization. WC, Auto, GL, Auto Physical Damage, Prof Liability, Earthquake, Flood , Healtcare Generally. only WC, Auto and GL self insurance plans are subject to State Regulatory control

ERISA

Act that allows employers to set up insurance plans. Also allows funding for Medicaid

Loss Reserve

An estimate of the amount of money the insurer expects to pay in the future for losses that have already occurred and been reported, but are not yet settled.

Litigation Management

An ongoing process intended to control legal expenses while maintaining high-quality legal services. Evaluating and selecting defense lawyers, supervising them during litigation keeping records o their costs. Cost effective resolution of claim disputes

Self insurance is best for losses

High Frequency and Low Severity Plans are normally coupled with the purchase of excess liability insurance to cover severe losses

Self insurance is well suited for

Losses that can be budgeted and paid out over time, self insurance saves money Loss exposures include workers comp, Auto Physical Damage, Professional liability, flood and earthquake

Taxes, Assessments & Fees- Self insurance

Most states require but each has their own approach to determine the amount owed the cost component is usually lower that that of insurance, because the states charges are not levied against the administration and risk control expenses

Unfunded Self Insurance

Organization pays for losses out of it's cash flows or available (liquid) assets

Self insurance is most appropriate for

Organizations that are committed to risk control, able to tolerate risk retention, willing to devote capital and resources to program's financing and administration

Funded Self Insurance

Reserves are backed by an internal fund that is recorded as an asset on the organizations balance sheet

ERISA has been allowed to

Self insure health benefit plans (also called employer based health plans) are the means in which over 50M employee receive health care Employees are required to contribute to offset the plan's costs. Plans involve using a 3rd party administrator and purchasing excess insurance

Deferral of tax deductions is a disadvantage because

insurance allows an organization to take a tax deduction in the year the premium is paid.

per accident basis

per accident limit is the maximum amount that an insurance company will pay out for damages sustained by more than one person per accident. If four people are injured in one accident, and the policy limit is $200,000, the most the policy will pay in total is $200,000

Overestimation of loss reserves

results in an understatement of net income

Aggregate Stop Loss

the amount paid in total for all loss occurrences or accidents during a specified period. This type of coverage is to ensure that catastrophic claims (specific stop-loss) or numerous claims (aggregate stop-loss), do not upset the financial reserves of a self-funded plan.

Self insured losses are not tax deductible until

they are paid However, Organizations that purchase insurance from an insurer, may treat the insurance premium as a tax deductible expense regardless of when losses are incurred

GAAP states that a loss reserve must be established if these two conditions are met..

1. The loss occurred before the date of the financial statement 2. the amount that will be paid on the loss can be reasonably estimated

Disadvantage of self insured plans

1. Uncertainty of retained loss outcomes- can negatively affect an organizations earnings, net worth and cash flow 2. Administrative requirements- claims must be recorded, adjusted, reserved, litigation must be managed, regulatory filings must be made taxes, assessment and fees paid 3. Deferral of tax deductions- All risk retention and transfer expenses are tax deductible BUT ... The value of the expense varies depending on when it was paid. Greater benefit is achieved taxing tax benefit sooner than later. 4. Tax deduction occurs only when losses are paid, not when they occur. 5. Contractual requirements

Purpose of Self Insurance

Enable an organization to lower it's long term risk by allowing to pay for its own losses without incurring the transaction cost associated with insurance

Per Occurrence Limit

The most the coverage will pay for a loss arising out of any 1 occurrence, regardless of overall policy limits. A per occurrence limit is the most the insurer must pay for for the sum of all damages for any one occurrence. The policy will never pay more than the per occurrence limit for any one occurrence.

self-insurance is

a form of retention. Organization records its losses and maintains a formal system to pay them.

Self-insurance

a special form of planned retention by which part or all of a given loss exposure is retained by the firm Also called Retention by Default

earnings smoothing

an attempt to manipulate its loss reserves to minimize volatility of its financial results over time

Administration of Self Insurance Plans

can be time consuming. Requires funding , keeping records of claims, adjustment of claims, reserving losses