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Self-Insuring: What You Should Know

Self-Insuring: What You Should Know

The sharing economy has changed the way that businesses and individuals look at the world. If you need a ride you may no longer hail a cab, but use an app on your phone to call a car. If you have unexpected expenses, you may sign up for a crowd funding site. If your business seems too small to get insurance, you may band together with other small businesses to get insurance for your group.

This outside the box thinking, while admirable, does present some challenges when it comes to insurance and those unexpected expenses it is meant to cover.

Underwriting Can Be Tricky

A number of crowd-sourcing type self-insurance vehicles have begun to hit the market in response to increasing health insurance premiums. These can be used an alternative to traditional health care plans, and may even fulfill the Affordable Care Act requirement for insured individuals at a reduced cost. What’s not to like about that?

Many of these programs have strict application requirements, which are submitted online. Applicants are pooled into groups with like individuals: similar age, similar health status, certain activity levels, etc. Premium investments are dependent on these factors, so some applicants may fudge the numbers a bit in order to qualify for lower cost.

The pool of resources in these groups is significantly smaller than that of an insurance company, which may not be underwriting the group coverage. Dishonest individuals make the same small payments as everyone else, but use far more of the resources. They may eventually be found out, but have used more than their fair share of the premium pool, causing a shortfall for other participants.

Can The Income Cover The Expenses?

Crowd-sourcing insurance policies are known in the insurance industry by another name: Risk Purchasing Groups (RPG). These are a valid form of insurance for industries and groups that may find insurance hard to obtain. Typically these are underwritten by an insurance company, but premiums are paid into a general fund for claims generated by that particular group.

Depending on the size of the group this fund may be more than sufficient to cover any claims that occur during the policy period. Where these Risk Purchasing Groups run into trouble is when claims exceed the funds taken in by the group. In those cases, each member of the group may receive a bill for an assessment.

Assessments are invoiced on amounts over the available group capital, and are divided equally amongst all members of the group. If it is a large group the assessments might, in theory, be smaller. However the larger the group, the larger the likelihood of a claim or claims exceeding the group’s spending power.

Newer and smaller groups will lack the ability to cover claims until they are more established and have a larger amount of capital. Some newer groups are promising to donate profits to charitable organizations, but the likelihood of profits on these policies is slim. With full occurrence policies, claims on prior year policies could not only decimate any profit, but result in even higher assessments.

Is It Worth the Risk?

Insurance is about transferring risk. You and others like you purchase coverage at a small price with the expectation that the insurance company will pay your claims if you have one (or several). Larger insurance companies and risk purchasing groups are able to spread the risk further.

Will a new, innovative risk purchasing group or crowd-sourcing initiative provide the coverage you need? It’s possible. Will the insurance premium savings alleviate any potential gaps in coverage? That is unlikely.

When you purchase from an insurance company, you can usually be certain that the company has the financial stability to pay your claims. Does the risk purchasing group have the financial means to cover your claims without assessments? Where can you go to find out more information about that group? How will you assess their ability to manage finances in order to pay claims if needed?

A licensed, knowledgeable insurance broker can give you insight into many products and services that will maximize both premium dollars and coverage. The consultation and quote are usually free, so what have you got to lose? If you have received a quote from an online group, consult with your broker before offering premium payment. There may be better options available.

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