Go your own way and self—insure; it’s cheaper and more effective to insure on your own at a time when companies face insolvency – point/counterpoint
Companies have traditionally transferred their risks to an insurance company through the purchase of a policy. As the market has hardened, however, retaining risks through self-insurance has become a growing trend for a number of reasons.
Chief among them is the fact that premiums have increased 10 percent to 25 percent, to as high as 300 percent to 400 percent, depending on the particular line and location of the insured. Many risk managers know their risk profiles have not increased in proportion to these rates, and have turned to self-insurance as an alternative.
There is also much concern over the financial stability of carriers. In 2002, 40 insurers were placed under supervision or into liquidation. Risk managers fear that more insurers may be headed toward insolvency, especially because insurers are plagued by multiple challenges, including the effects of September 11th, escalating catastrophe losses, low reserves, shaky investment markets, and a litigious climate.
Terms and conditions have also tightened, and claims are being denied for all sorts of reasons, proving to risk managers that insurance is not a guarantee that losses will be covered.
Out of this environment, self insurance has emerged as an effective means to not only avoid high premiums, but to also effectively control claims costs and outcomes. On the whole, self-insurance is an excellent strategy, provided that a company is prepared to take on a little risk, has the right risk management expertise, and has capable IT systems to manage the claims processes and carefully monitor risks as they develop.
Settling and paying claims is a core business process and the single greatest expense in insurance. Processing inefficiency has continued to be a major source of waste, with billions of dollars lost to manual processes that require significant manpower.
To put a lid on claims costs, self-insured organizations have applied automation to each step of the claims management process. Whereas, most insurance companies have significant investments in systems that are typically 10 to 15 years old, self-insured organizations have implemented the next generation of claims software that is native to the Internet.
Many of these organizations have employees, claims staff and risk managers distributed across the country. As a result, they benefit room the instant connectivity and communication that the Internet can provide. Browser-based technology also makes risk management reports accessible to a greater number of people who can help to control costs and improve results
Self-insured organizations can then use real-time information to tightly manage risks at every level of their organization. In the past, risk managers were not always aware of problem areas within their companies. Now, with sophisticated technology, they are automatically notified of the latest, most critical losses, along with line managers, who have a direct impact on claims response and loss prevention programs.
With many factors pointing to prolonged hard market conditions, there is more pressure than ever on risk managers to improve performance, cut claims and overhead costs, as well as improve the overall bottom line. Many companies have moved to self-insurance to successfully achieve these objectives. In some industries, self-insurance has delivered savings of 20 percent to 40 percent over traditional insurance.
Of course, there are risks to self-insurance, such as inadequate loss control, insufficient funding mad inadequate understanding of exposure. But today, technology exists to help risk managers reduce claims, improve outcomes, and speed up rapid claims management to achieve the best results.
Robert Faulhaber is president of Valley Oak Systems Inc., a manufacturer of claims management software.
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