Save Money on Business Insurance: Self-Insure What You Can

Insurance companies have operating expenses, just like any other business, and the desire for profit. Insurance companies typically have an “expense ratio” of between 30-35% and claim handling expenses of about 10%. They would love to make a profit of 5-10%. Only about half of this money is available for actual claim payment. The insurance company will charge you twice what they expect to pay for claims. Self-insuring claims you can afford will help you save around 50% over the long term.

Keep these things in mind.

First, the short-term and long-term are very different. Murphy’s Law can cause havoc with even the best laid plans. It is possible to have multiple claims, up to five for $100,000. You should ensure that you are able to cover not only the expected claims, but also the worst-case scenario. Consider the possibility that a tornado, earthquake or flood could cause damage to multiple vehicles. If you are able to handle the worst scenario without putting your company at risk, then you can drop the insurance. This will allow you to make a profit over several years. Side benefit: Companies tend to take safety and loss control much more seriously when they have money at stake, which will increase your chances of a positive outcome.

You must also ensure that you have thoroughly analyzed your exposures. Self-insuring known risks is one thing, but not being able to recognize risks is quite another. Self-insurance should not be confused with insurance, or non-insurance. If you are considering self-insuring perils to your vehicles, it is important that you consider the possibility of not having earthquake or flood insurance for your inventory, buildings, or other properties. If all of them are in the same place and could be at risk, then you should consider how much each one will cost and adjust your self-insurance limit accordingly. This is a crucial step and you may need to hire help if you don’t have the expertise. While many brokers are competent enough to help, it is a good idea to seek out an independent consultant or risk manager if your situation is more complicated. For assistance, you might contact RIMS (the Risk and Insurance Management Society ).

Third, ensure that your lender or bank is on board. Many loans require insurance. If you don’t have it, they will give it to you. This insurance can be expensive and should be avoided. Before you move forward, discuss your self-insurance plan with them.

Fourth, make sure your bank, stockholders, auditors, partners, etc. Accept some earnings volatility. Insurance has the advantage of balancing out the risks and providing earnings stability. You might want to build up your reserves and start slowly if stability is important. You can start by increasing your deductible and tracking the savings or losses.

Fifth, do not self-insure for high severity claims. Even if you have the most modern sprinklers, alarms and fireproof construction, it is still a risk. If you are unsure about the likelihood of a fire, I wouldn’t recommend self-insuring your building. Even the most well-maintained properties can suffer large and even total losses. It is not sensible to take this risk in order to save what may be a small premium. For your self-insurance program, you should focus on areas that are more likely to suffer losses and where they are less severe.