1.5.11 Self-Insurers
Self-insurers create their own reserves to provide coverage for future losses. Self-insurance is a risk management method whereby an eligible risk is retained, but a calculated amount of money is set aside to compensate for any potential future losses.
Normally, catastrophic risks are not self-insured as they are highly unpredictable and high in loss-value. Self-insurance is often used by large companies for workers' compensation purposes and for funding pension plans. Self-insurers will bear the loss up to a maximum amount or may look to an insurance company to provide insurance above a certain maximum level of loss.
What is the purpose of a "legal reserve"?
How does a "legal reserve" life insurance company differ from an assessment life insurance company?
Advantages of Self-Insurance
Self-insurers retain the use of their funds instead of having to pass the funds on to another insurance company. Cost savings are usually realized through the elimination of carrying-costs (administrative costs) and if losses are less than projected.
Disadvantages of Self-Insurance
On the other hand, actual losses may be more than predicted, in which case a financial strain may be put upon the self-insurer. If actual losses are higher than projected, administrative expenses would most likely be increased as well.
After the following brief quiz, we'll take a look at some government insurers.
