Self-Insured

What is it?

According to Investopedia- Self Insure- Self-insure is a risk management technique in which a company or individual sets aside a pool of money to be used to remedy an unexpected loss. Theoretically, one can self-insure against any type of loss. In practice, however, most people choose to purchase insurance against potentially large, infrequent losses. For example, most people choose to purchase auto insurance and health insurance from an insurance company rather than self-insure against car accidents or serious illness.




Read more: Self-Insurehttps://www.investopedia.com/terms/s/self-insure.asp#ixzz55hGP0AFr

This means that the primary insuree–ie..Carrier- Insures itself, against losses due to the ability to cover any unexpected loss(es) from accidents or claims.  They have enough funding to cover each loss they incur from the operation of the set business.  This typically saves the business, profits that normally would be paid out to the insurance providers for their Liability and Cargo insurances.   In turn the Carrier can REINSURE their self insurance policy — against major losses, through the Reinsurer– Berkshire Hathaway is the most common one everyone knows is a large holder of Reinsurance policies.

FMCSA Regulation- 49 CFR 387.309 states:

The FMCSA will consider and will approve, subject to appropriate and reasonable conditions, the application of a motor carrier to qualify as a self-insurer, if the carrier furnishes a true and accurate statement of its financial condition and other evidence that establishes to the satisfaction of theFMCSA the ability of the motor carrier to satisfy its obligation for bodily injury liability, property damage liability, or cargo liability. Application Guidelines: In addition to filing Form BMC 40, applicants for authority to self-insure against bodily injury and property damage claims should submit evidence that will allow theFMCSA to determine:

(1) The adequacy of the tangible net worth of the motor carrier in relation to the size of operations and the extent of its request for self-insurance authority. Applicant should demonstrate that it will maintain a net worth that will ensure that it will be able to meet its statutory obligations to the public to indemnify all claimants in the event of loss.

(2)The existence of a sound self-insurance program.Applicant should demonstrate that it has established, and will maintain, an insurance program that will protect the public against all claims to the same extent as the minimum security limits applicable to applicant under § 387.303 of this part. Such a program may include, but not be limited to, one or more of the following: Irrevocable letters of credit; irrevocable trust funds; reserves; sinking funds; third-party financial guarantees, parent company or affiliate sureties; excess insurance coverage; or other similar arrangements.

(3)The existence of an adequate safety program.Applicant must submit evidence of a current “satisfactory” safety rating by the United States Department of Transportation. Non-rated carriers need only certify that they have not been rated. Applications by carriers with a less than satisfactory rating will be summarily denied. Any self-insurance authority granted by the FMCSA will automatically expire 30 days after a carrier receives a less than satisfactory rating from DOT.

(4)Additional information.Applicant must submit such additional information to support its application as the FMCSA may require.

(b)Other securities or agreements. The FMCSA also will consider applications for approval of other securities or agreements and will approve any such application if satisfied that the security or agreement offered will afford the security for protection of the public contemplated by 49 U.S.C. 13906.

 

According to BusinessInsurance.com;

By self-insuring, a trucking company can lower traditional insurance costs by reducing collateral requirements that are needed when a large-deductible program is used. They also will have more control over their claims handling, which can help them control costs. It also should be noted that while self-insuring is what some industry experts deem as a viable option, it’s not for everyone.

Midsize trucking companies with fleets between 500 and 1,500 trucks can have a hard time proving that they are financially capable of self-insuring the first $1 million in liability limits, the standard requirement of the FMCSA, according to several transportation brokers. And motor carriers with fewer than 500 units, which accounts for the bulk of the U.S. trucking industry, usually don’t consider self-insurance an option.

“It’s not surprising the larger motor carriers can produce a more favorable package to meet the criteria,” said Jeff Toole, an attorney specializing in transportation law with Indianapolis-based Scopelitis, Garvin, Light, Hanson & Feary L.P. “The larger carriers have more resources to pull from and larger risk management programs. So, in a sense, the criterion to gain approval is somewhat self-filtering.”

For a motor carrier to be approved for self-insurance according to the FMCSA guidelines, the trucking company must provide a “true and accurate statement of its financial condition and other evidence that establishes to the satisfaction of the FMCSA the ability of the motor carrier to satisfy the obligation for bodily injury liability, property damage liability or cargo liability.” Further, the motor carrier has to provide claims and loss data, risk management program information and safety records.

Typical liability limits are $1 million for general goods and $5 million for hazardous materials. Excess insurance can be purchased to put over the top of the self-insured limit.

The process to approve, Mr. Toole said, can take as little as 90 days or as long as nearly two years.

Read the whole article:  Self Insurance Helps Trucking Firms

Ways to implement-

Self Insurance can happen in a few different ways.  Risk is still the same, with these ways-  There are options to mitigation, risk loss (stop loss) protection, pools.  These ways are explained below.

Gregory Boop-Author on the balance, The balance–protecting your business…..

One self-insurance mechanism used by some businesses is a self-insured retention. A self-insured retention (SIR) can be used in conjunction with a general liabilityauto liability, or workers compensation policy. It can be an effective way to save money on insurance premiums……

Basically, these type of coverages for the business being self insured, accept risk in the amounts of a portion, of the liability values.  The Insurances require those values covered.  Liquidity is key.  Then they accept the portions above or below based on the primary policy styling they typically find.

These do work for individuals as well.  Remember it is a matter of liquidity and Insuring against losses–Hence why drivers —- can be held for the cargo deductibles that the carrier insures—In House-  Out of the Carriers Accounts-  These funds are locked in:

More and More that I find, is that carriers, are accepting their risk, but placing the driver against losses- customers should not have the carrier guarantee the load count, if you can not do business with that business through the sales procedures, get the load to warehouse ,count it as it comes out with the systems in place, ensure that the person you are transacting with is doing as they should per your purchase, then in turn, you are doing as you should as well; without the fear Honor—–why do business with them?   Then have the carrier held liable for the actions of the business you choose to operate——–I had personally, one produce load, miscounting—out of like 2,075 cases spread out with the 7 different produces and each having 3/4 brands each, pallets, wrapped in plastic wrap.  I personally miscounted 3 or 4 boxes.  Guess who bought them cases of produce…….Still, have the receipt from the major carrier…..Cost me $3-400 out of my following weeks settlement.  Got to love being an Owner Operator-

The benefits according to thebalance.com: Protecting your business…….

A SIR offers several benefits. First, it can provide significant savings on insurance premiums. Another advantage is greater control over the claims adjustment process. When a claim falls within the SIR, you can decide whether to settle it or contest it in court. Thirdly, you will have an incentive to control losses since you will be paying many of them using your own funds. Fourthly, your cash flow may improve. You’ll pay losses as they occur rather than paying for them in advance via insurance premiums.

Group Self-Insurance-  Pooling

Pooling is spreading the risk out over the collective group of businesses, needing similar insurance needs.  Not everywhere allows this type of self insurance.  Be mindful and understanding that in order to utilize some of these ways to invoke Self Insurance premiums, your business may need to transfer HQ>

Captive Self-Insurance-

Capstone Associated Capstone Associated-

Trucking companies pay premiums to the captive insurance company, just as they would to a commercial insurance company. Funds accumulate inside the captive which then can be used to fund losses. Captive insurers operating under IRC 831(b) offer a 0% Federal income tax paid on the captive’s underwriting profits, all with a view to more quickly building up capital inside the captive to be available to fund later losses.

Moreover, if there is undistributed earned surplus, i.e., where there are no claims made, at some point funds can be distributed as a dividend or used to fund a secured loan back to the operating company. Premium costs are lower, because in the commercial markets, “special” or customized coverages, especially those with few policy exclusions, tend to be much more expensive. Typically coverages written through the captive are not readily available in the conventional markets. Business owners gain better control over their risk management efforts, more comprehensive coverages, and a more advantageous planning solution.

Bottom line: Captive insurance for trucking fleet operators is a powerful supplement to commercial insurance alone. Savvy business owners in trucking who form their own captive insurance company can count on a new level of risk management, as they combat risk in such a competitive industry.

On their Article-Captive Insurance for Businesses

Forming a captive insurance company can help combat industry-specific risks and fill gaps in coverage. A “captive” is an insurance company that’s been formed to insure the risks of an affiliated business. Captives formed under Section 831(b) of the Internal Revenue Code may also promote financial efficiency within your business via tax-advantaged premiums, dividends, and secured loans.

Business owners in the mid-market who start an insurance company are able to fund losses and have more control over the claims process. Captive planning also gives business owners another source of investment income, when no claims are made within a given calendar year.

The captive insurance option is where the Self Insured-  Creates an insurance company, that accepts the premiums for the policy they provide.  Creating a Policy-Type coverage to the New Insurance Company- Customer; the Carrier creating the Insurer.  The Insurer of the Carrier, completely funded by the Carrier-  Now gets paid the premium on the newly written policy.  The Insurance company, then does as an insurer does, and begins investing the money, To Profit from investment, mitigating risk and losses to claims, hedging the known—This also allows the maintaining of policies for the other similar type businesses, creates additional profitable revenue streams—- in house—–ever wonder how you get insurance through your Non-Profit yet cost you more or less money from the traditional outside Insurer?

Yeah, the group or collectively pool:  Provide the statistical numbers of the group and give traditional pricing structure through prior holdings of the business –  Average them out—Understanding the positive or negative acceptable rate—providing a premium coverage for the collective lowering of insurance costs.  This pool stays to the float, creating profitable margins on the collective……..

Business is business-  however, these should be used only as the intended- to provide quality insurance coverage, with sound investing and guarantee operation insurance policy payment—–Yes, you have to pay the policy to keep the policy, the new business is clear–profit from the float is a must to mitigate the known risk factors……you got to make money to mitigate risk…….

Lets say mr. self insured carrier —is paying his own insurance provider (he owns) and locking in the profits from the insurance providers. Now lets consider—based on the small guy carrier trying to build—-

We all know your insurance–and cargo premiums are around $8000 per truck—some as high as $11k per truck and more—-Last fleet policy, seen for a client review, — was over $54k per year in premiums—–That was 10 vehicles—-after a hike from $48k prior year–premiums pay out to the insurance provider—long term ownership!! Over 15 years, profitable every year……since inception.

The key to this structure is having the foundation of corporate governance, premium investment outlays prior through the Investment Officer, and funding the corporate structure to a sound annual budget and goals for the float, understanding of loss risk, acceptable and unacceptable risks, potential stop loss with new insurer, hedge investment principles—-protecting the float, capitalization, and proper utilization of the capital investment funds, risk funds, and visual, while management seeks the potential to become a public insurer of policies…

 

Which way and what combination(s) along with potential reinsurancing protections for the Carriers, who self insure because of the need to save costs or losses resulting from the payment of protection required, or needed by the business from an Insurance Company selling to the carrier.  These policies are primarily used for the companies, that pay over $1-3 million in premiums.  These businesses have at this funding source, the need to save even more capital for the business shareholders profits; it also shows clear acceptable understanding of potential loss, defined statistical data of what their claims have been over the prior period; and how to protect their interest and proper control over them.

However, this is not limited to just these size companies.  Anyone can use these before they reach these sizes by finding owners of similar interest, data, and premiums-  grouping the pool, showing adequate protectionable assets, and Locking in the Funds to protect the group—Then properly planning and investing in the policies for the group…..constant analysis, determination, and group efforts toward the goals of the group.

 

How many claims does a carrier average per truck per year?  How about every 5 years?  Maybe a group of fleet size, will give us a better number?  I see guys who run 20 years without claims; and I have seen the carriers that file claims every 6 months:

Strategy for the carrier is primary- and ultimately will mandate the cost savings mandatory, to the shareholders of the large fleet.  Understanding the basis, and structure to Self-Insure will ensure that the shareholders are protected, and the fleet covered on all levels, protection against losses due to claims, and financial avenues that best save money as well as the ones coverage that is self insuring.  Coverage of capital losses through smart business decisions and investment of the float to give adequate returns on capital used to insure.

 

 

 

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