6 4 Loss contingencies and insurance coverage

Insurance is designed to protect against financial losses you can’t afford to bear, but for losses that you can afford, self-insurance can save money since you aren’t paying insurance premiums. When considering self-insurance, you’re weighing the certainty of spending money on premiums against the possibility of incurring a loss that you won’t be able to turn to insurance to pay for. Self-insurance involves setting aside your own money to pay for a possible loss instead of purchasing insurance and expecting an insurance company to reimburse you. With self-insurance, you pay for a cost such as a medical procedure, water damage, theft, or a fender bender out of your own pocket rather than filing a claim under your policy with an insurance company. The rules and regulations that apply to self-insured health plans aren’t always the same as the rules and regulations that apply to fully insured health plans.

(Yes, it’s an awesome way to live.) As for the income generated by your savings, investments and assets, you’ve got three (or maybe four) steps to see if you’re there. Self-insurance is about you working to become your own insurance provider. Say you have a term life insurance policy (which is the only type of life insurance we recommend) that lasted 20 years. When it comes to life insurance, self-insured means having enough in investments to replace your income and provide for your loved ones after you’ve died. Your dependents won’t need to worry about paying bills, putting food on the table, or anything else they’ve depended on your income for. You probably already self-insure for certain items without even realizing it.

Companies will oftentimes appropriate retained earnings to pay for losses. For example, the risk management team in a company may decide to take a self-insurance approach to employee medical claims. The board of directors of the company would then set aside (appropriate) retained earnings of the company to pay for medical claims. Such contingencies would be disclosed in the notes to the company’s financial statements. Additionally, self-insurance provides cash flow advantages when payments are made over the life of the claim instead of paying premium costs up front.

• Examples include premium taxes, assessments for residual market losses which are proportional to premium volume, and administrative costs.
• With first dollar coverage, the insured has no financial pressure in the form of deductibles or retentions; however, many businesses retain a portion of the financial risk of loss instead of purchasing first dollar insurance.
• Your employer might have chosen to create a very robust benefits package to use as a recruitment and retention tool, and your coverage may well be more generous than it would be if the employer purchased coverage from a health insurance company.
• DTTL (also referred to as “Deloitte Global”) does not provide services to clients.
• Other data sources that can be used to make informed decisions include utilization data, employee and member feedback, and benchmarking against similar insurance programs used by other organizations.

If a policy is canceled before it expires, part of the original premium payment must be returned to the policyholder. The COVID-19 pandemic has presented insurance companies with several challenges, such as swiftly transitioning to a remote workforce and reassessing their financial goals and market strategies in a contracting economy. In addition, insurers should not overlook the need to manage their potential reputational risks in the midst of this pandemic.

Accounting Standards for Self-Insured Companies

Generally Accepted Accounting Principles require companies to record these self-insurance losses as they are incurred. According to FASB’s Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, companies are not permitted to accrue futures contract definition an expense for self-insurance claims. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.

• Long-Term Cost Management Strategies
  Employers must take a long-term view in managing self-funded health insurance costs.
• Remember, you’re ready to be self-insured for your life insurance when you’re debt-free and have plenty in savings to cover your income year after year.
• This includes implementing strategies that take into account the changing healthcare landscape and the evolving needs of their workforce.
• But others, such as products liability and some workers compensation claims, may be settled long after the policy has expired.
• With more than a decade of accounting and finance experience, Charlette has worked side-by-side with HR and accounting leaders to establish and help implement payroll best practices, controls, and systems.

To protect insurance company policyholders, state insurance regulators began to monitor insurance company solvency. As they did, a special insurance accounting standards, known as statutory accounting principles and practices, or SAP, developed. The term statutory accounting denotes the fact that SAP embodies practices prescribed or permitted by state law. Accounting is a critical aspect of managing self-funded health insurance. Self-funded health insurance plans differ from fully-insured plans in that the employer assumes the financial risks of the plan, including paying for claims.

III. Budgeting for Self-Funded Health Insurance

The actual cost of each policy to the insurer is not known until the end of the policy period (or for some insurance products long after the end of the policy period), when the cost of claims can be calculated with finality. Being self-insured means you can feel confident about raising the deductibles on the insurance you can’t avoid, like your auto, home and health insurance. A higher deductible usually lowers your premium because you’re sharing more of the cost of any claims with your insurance company.

How Does Self-Insured Life Insurance Work?

Drilled into the head of every accounting student are the generally accepted accounting principles, or GAAP, that govern the process of accounting. These principles form the foundation on which companies, especially publicly traded ones, base their financial reporting. While self-insured companies build an accounting foundation on GAAP, they must also adhere to another set of accounting standards as set by the state in which they do business. And insurers and TPAs that contract with self-insured businesses are increasingly offering products that make it easier for smaller businesses to self-insure.

The TPA, in addition to a claims administration, may also take responsibility for complying with administrative, legal, and regulatory requirements related to the self-insurance plan. As described above, state-based laws and regulations generally only apply to fully-insured plans. Self-insured plans are not subject to them, although there is sometimes an option for self-insured plans to opt into these requirements. This can be the case, for example, if a state starts to require state-regulated plans to cover something like infertility treatment, but then people with self-insured plans don’t get that benefit unless their employer decides to offer it. Self-insured health insurance plans are not subject to state insurance laws and oversight. Instead, they’re regulated at the federal level under ERISA (the Employee Retirement Income Security Act) and various provisions in other federal laws like HIPAA and the ACA.

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Related Terms

According to a 2022 Kaiser Family Foundation analysis, 65% of U.S. employees with employer-sponsored health insurance are in self-insured plans. In addition to monitoring claims data and expenses, it is important to use data to make informed decisions. This data can be used to identify trends and areas of the insurance program that may require additional attention or that could benefit from changes. For example, if claims data reveals a high level of claims being submitted for a particular treatment or condition, this could prompt a review of benefit coverage to determine whether the plan is still providing appropriate coverage.

For very expensive risks, self-insurance only makes sense if you’re wealthy. For one, if you have a mortgage, your lender will require you to carry homeowners insurance. But even if your house is paid off, you probably don’t want the risk of having to pay out of pocket to completely rebuild it if it burns to the ground. In times of uncertainty and financial stress, it seems increasingly important for the insurance sector and broader financial services industry to maintain connections and be well-positioned to serve clients.