Self Insurance: Policy to take care of your employees

Employers who would want to cover their employees for worker's compensation liabilities have two options:

1. Get into a contract with an insurance company to provide them the best deals
2. Enroll for a self insurance program

With self insurance a qualified employer can provide their own coverage for worker's compensation. This risk management method covers for its employees by keeping aside a set amount of money big enough to be able to provide a coverage for any uncertain loss in the future.

Any predictable or measurable risk can be insured. Risks must represent a future uncertain occurrence not under the control of the policyholder. Usually risks that are catastrophic cannot be self insured since they have a high loss value and on top of that highly unpredictable. An example may be earthquakes. Earthquakes may cause more damage than an insurer can provide coverage for.

The system of protected self insurance allows the organizations to retain the handling of predictable and manageable risks and transfer the catastrophic risks to proper insurance companies.

You will rarely find a full or exclusive self insurance. The best self insurance coverage is found by combining self insurance and commercial insurance. What happens normally is that the losses that are predictable and manageable are retained by organizations under insurable risks in self insurance. This forms a first layer of cover and the stop loss policy that is then required is purchased from the commercial insurance market. The losses that occur beyond the specified self insurance limits is then compensated from this commercial insurance market.

To be able to decide if your organization should become self insured you may add up the premiums your organization paid to the insurance companies in the last 5 years. What the insurers paid out to you as a result of losses in the last 5 years need to be subtracted from this amount. If you have paid more premiums to the insurance company than what benefits you received from them, then you can apply for self insurance.