A self funded employee benefit plan has a number of advantage over a more traditional insured plan. They include;
- The self-funded plan may be tailored to fit the needs of the group.
- The self-funded plan has lower fixed costs than a fully insured plan. Most expenses are variable based on the actual claims.
- The self-funded employer may use the independent managed-care measures, such as preferred provider organizations, per-certification and utilization review, that save the most money, rather than simply those the carrier offers.
- Any leftover funds in the claim account may be reconciled against future contributions.
- Interest earned on the claim account is considered income to a non-qualified plan. A qualified plan may use this interest for future benefit payment.
- Benefit plan administration through a professional third-party administrator is reasonably and competitive priced. Only slightly more involvement by the employer is required, such as verifying eligibility, printing employee communication materials, and distributing claim checks.
- Self funding with stop-loss coverage simplifies budgeting because the employer always its maximum expenditure for group health coverage.
- Administrative services such as claims handling are often simpler, faster and performed on a more personal and simpler, faster and performed on a more personal and professional basis. Bureaucratic red tape is eliminated.
Malpractice liability insurance difficult to obtain or too expensive to purchase. The physicians can form a risk retention group to insure their medical malpractices loss exposures. Risk retention groups are exempt from many state insurance laws that apply to other insurers. Nevertheless, every risk retention group must be licensed as a liability insurer in at least one state.
Advantages and Disadvantages of Retention; The risk retention technique has both advantages and disadvantages in a risk management program. The major advantages are;
- Save on loss costs. The firm can save money in the long run if its actual losses are less than the loss component in a private insurer’s premium.
- Save on expenses. The services provided by the insurer may be provided by the firm at a lower cost. Some expenses may be reduced, including loss-adjustment expenses, general administrative expenses, commissions and brokerage fees, risk control expenses, taxes and fees and the insurer’s profit.
- Encourage loss prevention. Because the exposure is retained, there may be a greater incentive for loss prevention.
- Insurance cash flow. Cash flow may be increased because the firm can use some of the funds that normally would be paid to the insurer at the beginning of the policy period.
The retention technique, however, has several disadvantages;
- Possible higher losses. The losses retained by the firm may be greater than the loss allowance in the insurance premium that is saved by not purchasing insurance. Also, in the short run, there may be great volatility in the firm’s loss experience.
- Possible higher expenses. Expenses may actually be higher. Outside experts such as safety engineers may have to be hired. Insurers may be able to provide risk control and claim services at a lower cost.
- Possible higher taxes. Income taxes may also be higher. The premiums paid to an insurer are immediately income tax deductible. However, if retention is used, only the amounts paid out for losses are deductible, and the deduction cannot be taken until the losses are actually paid. Contributions to a funded reserve are not actually paid. Contributions to a funded reserve are not income-tax deductible.
No-insurance Transfers; No-insurance transfers are another risk-financing technique. No-insurance transfers are methods other than insurance by which a pure risk and it’s potential financial consequences are transferred to another party. Examples of non-insurance transfers include contracts, leases and hold-harmless agreements. For example, a company’s contract with a construction firm to build a new plant can specify that the construction firm is responsible for any damage to the plant while it is being built. A firm’s computer lease can specify maintenance, repairs, and any physical damage to the plant while it is being built. A firm’s computer lease can specify that maintenance, repairs and any physical damage to the computer firm may insert a hold-harmless clause in a contract, by which one party assumes legal liability on behalf of another party. For example, a publishing firm may insert a hold-harmless clause in a contract, by which the author, not the publisher, is held legally liable if the publisher is sued for plagarism.
In a risk management program, no-insurance transfers have several advantages;
- The risk manager can transfer some potential-losses that are not commercially insurable.
- No-insurance transfers often cost less than insurance.
- The potential loss may be shifted to someone who is in better position to exercise loss control.
However, no insurance transfers have several disadvantages;
- The transfer of potential loss may fail because the contract language is ambiguous. Also, there may be no court precedents for the interpretation of a contract tailor-made to fit the situation.
- If the party to whom potential loss is transferred is unable to pay the loss, the firm is still responsible for the claim.
- An insurer may not give credit for the transfers, and insurance costs may not be reduced.
Insurance; Commercial Insurance is also used in risk management program. Insurance is appropriate for loss exposures that have a low probability of loss but the severity of loss is high.
If the risk manager uses insurance to treat certain loss exposures, five key areas must be emphasized .
- Selection of insurance coverage.
- Selection of an insurer.
- Negotiation of terms.
- Dissemination of information concerning insurance coverage.
- Periodic review of the insurance program.
So these are the advantages of self insurance.
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