Self-Funded: Is It Really Self-Funded?
Is self-funded really self-funded?
From a simple google 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.
However, the term "self-funded" is readily often used in the formalinsurance industry and for clarification, these "self-funded" options are not "risky" for qualified companies and should not be confused with informalself-insurance. Sadly, the fear and risk associated with informal self-insurance is commonly associated with formalself-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, 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.
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 causality 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."
Thisformalself-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 & 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 and create
Your Link to Security!