Self-Insurance Options Beat 'Going Bare'

But for many physicians, property owners, nursing home operators and risk managers, especially in states such as Florida, "going bare" is not an option–there simply is no choice. You can either have no insurance at all, or self-insure.

For those who can think strategically about their insurance programs, retaining all or part of a program is smart, possibly profitable, and less expensive in the long term.

Most people agree that if you can identify expected losses, usually through an actuarial study or review of your claims history, why pay that portion of the premium to an insurer? Of course, if you do elect to self-insure any portion of your program, the downside is that you can pay out more than expected losses.

Assessing whether you can employ a strategy of a formal risk retention program depends on your or your firms ability to understand its current situation, whether you can fund the program (or have access to cash), and if you can reasonably control or avoid the risk.

For some, like physicians and nursing homes, the last item may mean leaving the jurisdiction, retiring, or not performing certain services. For others, it may mean looking into a captive, a risk retention group, or taking large deductibles.

Id also suggest that you start by choosing a good risk manager, trusted broker, agent or consultant to help you put your plans into action; otherwise you might be wasting time and money. Always look to foster long-term relationships based on trust, experience and good, two-way communications.

Any plan you consider should be compared to a traditional insurance premium–if you have one to compare it to. Succinctly, the premium is comprised of three components–expected losses, profit and expenses. Your goal is to retain the losses the insurance carrier will pay on your behalf and reduce expenses without worrying about the profit. If the program is sound, managed well, and pays fewer claims than expected, youll have your profit and control.

A few of the self-insurance options to commercial buyers include:

Self-funding: This is a formal program involving varying degrees of self-insurance, usually with a layer of catastrophe insurance above the self-insured layer or some sort of stop-loss cover. Most often captives or their related applications are employed as the risk bearing entity.

In self-funded plans, regular contributions are made to pay claims on incurred but not reported losses. Most often a policy-issuing carrier is used to "front" for the plan.

Requirements include access to cash or a line of credit, predictable losses, risk management, tax handling, aggressive claims handling, a carrier to issue the policy, and patience.

Self-insured retentions or large deductibles are the most popular form of self-insurance–about 6,000 companies and their subsidiaries are self-insured for workers compensation, for example.

This used to be an option, and for many it still is, but with the current state of the market, some buyers are not given a choice. Some of these types of self-insurance dont have a formal risk retention program in place, and funds are not set aside in advance to pay claims under the SIR or deductible. Indications are that larger SIRs and deductibles are being used, mostly above $100,000 for larger programs.

To evaluate this program, Id suggest you look over your clients claims history and note the number of claims. If your client had a number of claims that were later dismissed, the deductible option may be best for you since you only pay if you lose the case. For control over claims management and possibly litigation, however, I would suggest the SIR.

Some of these programs have varying degrees of participation by a carrier and are used to protect the client's balance sheet from worst-case scenarios.

Fully funded is often considered a last resort, but is better than "going bare." Nursing homes in Florida and Texas have put this type of program to use to show evidence of insurance coverage to comply with state law, and to receive government reimbursement like Medicaid and Medicare.

In this program, a firm puts up all of the money to pay for all of the claims incurred, plus the expense of putting the plan into action. This plan is usually sold by a policy-issuing carrier that charges a fee to show proof of insurance. A captive may or may not be used.

Other expenses include claims handling fees and broker commission (if you use one). Limits funded range from $250,000 to $2 or $3 million. The amount funded is the limit on the policy.

With this program, access to cash and collateral is a must. Best case is that you dont have to use the funds. Worst case is that you use up all of your working capital, and more, if you have larger losses than anticipated.

Going bare is the absolute last resort, and is being used more often when insurance is unavailable or not affordable. There may or may not be a formal plan in place. Claims and expenses are paid out of operating cash.

For many people and firms, a large claim may mean going out of business, declaring bankruptcy, and losing hard-earned assets to pay for the claim. However, using this type of plan may be the only way to stay in business.

Although a lot more physicians would like to use this method, their hospital privileges are often contingent upon having medical malpractice insurance.

In Florida, however, a state statute (FS 458.320) allows physicians practicing there to "go bare." This means that under certain circumstances, some physicians may choose not to buy insurance, but they must agree to pay any judgment or claims out of their own pocket. Physicians using this option must display a sign in reception areas stating that they do not carry medical malpractice insurance.

Hospitals increasingly at risk in liability claims, in an effort to keep their doors open, may request that staff physicians put up a bond, a letter of credit, or put money into an escrow account–usually $250,000 or more–to obtain hospital privileges if they cant obtain insurance through regular means.

Alternative risk-transfer, of which self-insurance is part, is expected to represent about 50 percent of the U.S. market by the end of 2003. This is up from about 33 percent in the mid-1990s. Clearly, people are taking control of their destiny where they can.

As author Alvin Toffler discusses in "Future Shock," a book concerning institutions that change rapidly in short periods of time, this generation of insurance and risk management has leapt incredibly from first-dollar insurance in the 1960s, to the sophisticated, alternative risk-transfer programs of today.

Self-insurance is just one aspect of this trend, but one that will give your clients control and input over the destiny of their insurance programs.

Christopher L. Kramer is vice president of alternative risk-transfer at Denmark Group in Beachwood, Ohio.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 16, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.