Self-Funded: Is It Really Self-Funded?

What Does "Self-Funded" Really Mean?

From a simple search, "A 'self-funded' (or self-insured) designation means an entity -- such as an employer, student, or startup -- directly assumes the financial risk of paying for expenses or claims with its own capital, rather than paying premiums to a third-party insurance company or relying on external funding."

This accurate statement describes informal self-insurance. From this statement the risk is clear, defined and the risk is significant. "Self-Insurance" sounds scary. "Self-Insurance" in this sense is scary. What business owner would want to take on the burden of this risk?

Enter the insurance world. The multi-trillion-dollar industry where an operating company either chooses an insurance company to take on the risk -- for a premium, or a company is required by law to have an insurance company take on this risk -- for a premium.

Formal vs. Informal Self-Insurance

However, the term "self-funded" is readily often used in the formal insurance industry and for clarification, these "self-funded" options are not "risky" for qualified companies and should not be confused with informal self-insurance. Sadly, the fear and risk associated with informal self-insurance is commonly associated with formal self-insurance.

The most common use of the term "self-insurance" is in regard to self-insured medical benefit plans. Self-funded medical benefits are technically partially self-funded medical benefits. The partial portion is a small portion of the overall plan, which includes each of the components of a fully funded medical benefits plan such as the network, the administrator, stop-loss, and the pharmacy benefit manager or PBM.

The portion of a typical "self-funded medical plan" where an owner takes on some risk is the specific stop-loss layer where they choose how much "risk" to take on. This small layer is then protected by an aggregate or catastrophic layer/limit -- thus protecting the owner. The administrative goal is to have the same amount of exposure as the fully funded plan.

Captive Insurance: Formal Self-Insurance

Risk Management best practices are executed differently for a $1 million company versus a $100 million company, from a 25 employee company versus a 1000 employee company. Who qualifies to be "Self-Funded"?

Captive insurance is also periodically referenced as "self-insurance." A Captive insurance company may insure a wide range of exposures including portions of a medical benefits plan yet typically insure property and casualty lines of coverage.

When referring to Captive insurance -- "self-funded" is in reference to ownership. When a business owner either chooses or is required by law to insure certain exposures, and binds coverage through an insurance company he or she owns, i.e. Captive Insurance -- the result is formal "self-insurance."

This formal self-insurance is really not "self" insurance at all. Insurance is formally underwritten, capitalized, regulated, has a claims department, has limits, and must have and will include risk distribution, the law of large numbers in place to protect the insured -- the business owner. Experience shows the insurer will profit. Either the commercial insurer or your own insurance company.

Whether it is medical benefits, property and casualty, from the commercial market, or through your own Captive, there are boundaries and limits clearly defined, capitalized and regulated in the multi-trillion-dollar insurance industry.

Beware of informal "self-insurance." When you qualify, embrace formal self-insurance and owning YOUR own Captive Insurance Company.