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Essay Subject: Executive considerations before implementation. Risks, costs, benefits & dangers, financial stability, tax aspects, automation, claim settlements.... More...

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Paper Abstract: Executive considerations before implementation. Risks, costs, benefits & dangers, financial stability, tax aspects, automation, claim settlements. Paper Introduction: The purpose of this paper is to examine what an executive should know before implementing a self-insurance plan for his or her company. The concept of risk management has broad implications for a company's approach to insurance for its property/casualty loss exposures and employee benefits program. By embracing the principles and techniques of risk management, the company assumes responsibility for assessing its loss exposures, reducing or eliminating risk wherever possible, and properly insuring those risks that it is unable to eliminate. A properly conceived and administered risk management program allows the company to reduce the probability of loss, thus making it a more acceptable risk for insurers, and provides a more realistic framework with which to assess its insurance requirements. Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Examples of pseudo"self-insurance" in business and government abound. Definiteness of loss - the loss must be amenable to definition,i.e., observable and quantifiable. Insurance is defined by Greene as"an economic institution which reduces risk both to society and to theindividual by combining under one management a large group of objects sosituated that aggregate losses to which they are subject becomespredictable within narrow limits" (Greene, 1981, p. 28). 3). 26). 433).In a sense, the company charges itself insurance premiums and issuespayment for legitimate, verifiable claims. The structured settlement meets bothrequirements of the "all-events" test, which means that the deduction wouldbe allowed by the IRS. Business Insurance, 3. 4. As it has in so many other facets of business, automation couldrevolutionize companies' approach to risk management. Not every risk can be insured. The disadvantage is that the company retains acontingent liability in that if the life insurance company that sold theannuity goes out of business, the self-insurer would be responsible forfuture payments. Indeed, a basic principle of self-insurance is the combination, orpooling, of exposure to loss, which "broadens the units of exposure and mayaid in predicting future loss" (Bickelhaupt, 1974, p. to administer the medical, dental, and disability claimsof its 26, employees, who submitted about 123, claims in 1983(Taravella, 1984b pp. Washington, DC: Small Business Administration. While the fund is beingaccumulated, the firm must have some form of protection against interveninglosses. As Greene (1981) observes, "It cannot beoveremphasized that self-insurance is definitely not the solution for anunderfinanced firm trying to save money which it would otherwise pay outfor commercial insurance premiums" (p. The key advantage of structured settlements to the selfinsurer isthat the claim can be settled more quickly at a lower cost, with attendantsavings in legal expenses. The state of Michigan, which hadestablished a fire fund in lieu of insuring the property for its lossexposure, incurred a $4.5 million loss when a building was destroyed. The purpose of this paper is to examine what an executive should knowbefore implementing a self-insurance plan for his or her company. Greene, M. Denny's, Inc. Insurance principles and practices. One is the financial stability of the firm. Circuit Court of Appeals,are being contested by federal legislators and the IRS. 2. Non-insurance, as opposed to self-insurance, is not a viableoption for most companies. 5. Determining the appropriate size of the segregated fund is only oneof several problems facing the self-insurer. G. The concept of risk management has broad implications for a company'sapproach to insurance for its property/casualty loss exposures and employeebenefits program. The self-insurer thus is behaving much in the same manner as a commercial insurer,estimating the probability of loss based on a large number of units andproviding appropriate coverage. Of 119 benefit managers surveyed byBusiness Insurance, 21 percent have an in-house computerized program and 42percent expect to have them by the end of 1985 (Taravella, 1984a. Thefirm must adopt, and adhere to, a strict "hands off" policy regarding itsself-insurance reserves, even when faced with intervening needs. The annualemployee deductible was also raised from $1 to $2 . Office ofManagement and Budget, observed, "Nullifying the deduction in the Kaisercase will create a situation where an employer who utilizes traditionalinsurance carrier to provide workers compensation coverage will receive adeduction while a self-insurer will not" (Tarnoff, 1984, p. This rule is notabsolute, for an insurer will accept a new risk based on a reasonable non-statistical estimate of the loss probability. Business Insurance, 83-84.----------------------- 12 Most riskmanagement programs draw on elements from each category. However, the reserves must be sufficiently liquid tocover any insurance losses for which the fund is designed. 51). (1984, February 2 ). Bickelhaupt(1974) advises the firm to exercise care in "setting up and administeringthe self-insurance, not beguiling oneself into a feeling of security whenthe plan is not adequate" (p. However, an insurer may be willing to insure the loss givenappropriate loss control measures and other attempts to reduce theprobability of loss. Bydeducting the amount of the settlement the year the claim is settled, thefirm enjoys significant tax savings, along with the income generated byinvesting the settlement sum. And, of course, the firm'sfinancial resources must be adequate to meet the considerable obligationsof self-insurance. This test requires that (1) all events related to the company'sliability occurred during the tax year and (2) that the amount of theliability can be determined with "reasonable accuracy" (Tarnoff, 1984, p.26). A properly conceivedand administered risk management program allows the company to reduce theprobability of loss, thus making it a more acceptable risk for insurers,and provides a more realistic framework with which to assess its insurancerequirements. Risk managers and proponents of self-insurance oppose this measure,contending that it treats self-insurers and those who insure their riskswith insurance companies unequally, and that it could force self-insurersback into the commercial market. 3). Theadjacent library had been insured by a private company for $2 million at apremium of $3, , a mere fraction of the actual loss (Bickelhaupt, 1974,p. Irwin. Opponentsof the bill argue that nullifying the Kaiser decision could havedetrimental effects on business in general, given that many of the nation'slarger corporations self-insure their Workers Compensation plans.Moreover, the net effect on tax revenues would be the same; only thecollection would be accelerated, according to opponents. 23). An increasing number of firms are exploring thisoption to plan administration. An effective self-insurance programrequires the full support and understanding of management if it is tosucceed, reflecting the firm's overall philosophy and objectives. Automation at Ryder cutsadministration costs. 28). 7). (198 ). While many business risks are covered in this traditionalmanner, some companies may prefer to become self-insurers for certaincategories of risk. The advantages of self-insurance can be augmented by automatedprograms, structured settlements, and other innovative approaches to riskmanagement. 2). Among its cost-reduction measures under theself-administered plan, Denny's opted to cover outpatient treatment 1 percent, compared with the 8 /2 plan for inpatient treatment. Deductions under Workers Compensation plans, which weresanctioned under a 1983 ruling by the 9th U.S. References Bickelhaupt, D. Self-insurers are cautioned to select a financially solidcompany with a Best's rating of A-plus to protect themselves. (1984). Claims systems helping firms assessprograms. The management of risk can be divided into three broad categories (1)risk avoidance, (2) risk retention, and (3) risk transfer. 12. R. 3. To provide funds for anaverage loss, while it may relieve the firm of a present financial burden,may prove inadequate in the face of a major loss. Thus, self-insurance is not anexpediency for a firm in trouble; rather, it is a form of risk retentionavailable only within certain limitations. If a firm'sfinancial future is in question, possibly affecting its ability to pay anyincurred losses, the fund would have to be sufficient to sustain theselosses even during a period of financial hardship for the firm. Thus insurance canbe viewed both as one aspect of risk management and as the overridingprinciple by which the risk of loss is treated. The tax advantages are also significant. Self-insurance is frequently confused with non-insurance, but the twoare very distinct approaches to the treatment of risk. A firm that is considering self-insurance must carefully explore thetax ramifications. (1984b, February 6). General insurance. By embracing the principles and techniques of riskmanagement, the company assumes responsibility for assessing its lossexposures, reducing or eliminating risk wherever possible, and properlyinsuring those risks that it is unable to eliminate. 24). 3). By these criteria, two types of firms would not be likelycandidates for self-insurance, small businesses, which would not have asufficient number of similar exposure units, and firms without adequatefinancial resources. Homewood, IL:Richard D. A bill before the House Ways and MeansCommittee would replace the "all-events" test with an "economic-performance" test, under which deductions could be taken only after thecompany's liability has been discharged by payment from its reserve fund. Organizations thatmerely set aside the amount of the premium they would be paying to aninsurance company in effect are assuming a potentially disastrous financialobligation, in that in the event of a loss they would have to pay the fullamount of the loss with their own funds. Using theClaimsFacts system designed by ERISCO, Ryder's benefit department hasenjoyed a 13 percent increase in productivity since 1981, despite a 2 percent growth in claims volume during the same period (p. If a loss is likely to recur within acertain period, the fund must be sufficient to accommodate thatpossibility. is using an automated system produced by SystemDevelopment Corp. New York: John Wiley & Sons. Another innovation being implemented by a number of self-insurers arestructured settlements, an alternative to the lump-sum payment of claims.Under a structured settlement plan, the claimant receives a smaller initialsum for current expenses and is guaranteed continuous periodic paymentstailored to the future needs of the claimant and his or her family. This court ruling, which clearly works in favor of self-insurers, isbeing challenged by Congress as part of its effort to increase revenues andlower the federal deficit. Yet the advantages must be weighed in light of the firm'sability to incur the financial obligations of self-insurance. Because of the financialresources required and the necessity for a large number of risks, self-insurance is not a viable option for small firms or those whose financialcondition is uncertain. Theliquidity of the reserves is another factor to be considered. Taravella, S. Following are the five criteria bywhich a risk is judged to be insurable: 1. Testifying before the House Ways andMeans Committee, James McIntyre, former director of the U.S. A loss of a tax advantage can be partially offset byreductions in the costs of administering self-insurance. However,insurance "remains as the principle method of treating the many risks ofbusiness" (Bickelhaupt, 1974, p. The possibility of lossrepetition must also be considered. On the onehand, holding the reserve in the form of relatively non-liquid assetsprotects the integrity of the fund and may provide certain tax and otherfinancial advantages. The court ruledthat Kaiser Steel could deduct its reserves for uncontested WorkersCompensation claims because it complied with the so-called "all-events"test. 51). (1981). (1984a, February 6). Insurance and risk management for smallbusiness, 3rd ed. The savings fromthese measures and increased efficiency resulted in a reported savings ofalmost $1 million per year (p. Many firms thathave employed third-party administrators to process claims are switching toan automated in-house claims handling systems citing increasedproductivity, improved cash management, and reductions in costs and errorsas among the advantages using in-house computer terminals and speciallydesigned software packages, firms are able to assess their benefit plansand determine exactly how much money is being spent, invaluable informationin evaluating their risk management programs. An in-housecomputerized claims administration plan allows a firm to carefully trackthe flow of claims, providing analytical data for cost-saving adjustmentsin the benefit plan. The likelihood of loss is determined by the same statisticalmethods used by insurance companies to calculate loss probability. Structured settlements can lead totax breaks. Accidental nature of loss - an insurable loss cannot befortuitous or unexpected. Calculability - there must be a large enough number of risks topermit a statistical estimate of the probability of loss. Self-insurance, while it does have certaindisadvantages, requires that an organization administer a carefully definedand monitored program of risk management, one which does not permit theirresponsible assumption of risk. If a risk meets these five criteria, it can be assigned to aninsurance company, which can offer protection in exchange for the paymentof premiums. Clearly a segregated fund is preferable toearmarked surplus, because the former is apt to be more accessible and lesssubject to erroneous calculation or misuse. A loss occurring during the accumulation period obviously wouldhamper the firm's ability to meet its insurance and financial obligations.A second problem is maintaining the integrity of the fund. Business deductions to meet losses incurred are notpermitted by the IRS, except for some Workers Compensation plans and bad-debt reserves. Crane, F. The size of the company's self-insurance fund is determined byseveral factors. p. Importance - the risk must be large enough to make the handlingcosts minor relative to the size of the loss. 3, 11). Business Insurance, 3, 11. It mustbe supplemented by a loss control program that encompasses both lossprevention and loss reduction measures. A company opting for self-insurance, having met the above criteria,establishes funded reserves to pay any losses. 42). Self-insurance can be viewed as a type of positiverisk retention "in which an organization with many similar loss exposuressets aside a fund for the payment of future losses" (Crane, 198 , p. Absence of excessive catastrophic loss - there must be a largepossibility that a massive catastrophic loss will not occur. However, a 1964study showed that only seven out of 6 large firms which had self-insuranceused actual cash funds; the other 53 relied on bookkeeping reserves(Bickelhaupt, 1974, p. Two types of loss exposure thatare often handled through self-insurance are vehicle damage and workerscompensation, particularly for companies that own a fleet of vehicles orhave a large number of employees. Ideally, this fund consistsof segregated assets to which regular payments are made. If the potential loss istrivial, there is no point in insuring it, either from the insured's or theinsurer's point of view. L. A firm facedwith a financial emergency may be tempted to draw on the fund, even though-these monies have been specifically designated for insurance purposes. If a firm chooses to incorporate self-insurance into its riskmanagement, it will enjoy the advantages of increased control over itsinsurance program, savings in insurance premiums, and flexibility inadministering its risk management program. The viability of self-insurance as a risk management alternative thusdepends to some degree on the vagaries of tax rulings and the ability ofproponents of self-insurance to mount sufficient political pressure againstCongress and the IRS. . Two conditions must exist before a company considers self-insuranceas a viable alternative to traditional insurance: (1) there must be anumber of risks sufficiently spread geographically, and (2) the amount ofrisk in each location must be such that "a severe loss will not adverselyaffect the company or the funds set up for the losses" (Bickelhaupt, 1974,p. Ryder System, Inc., the Miami-basedtrucking giant, has saved over $5 , in medical payments in just oneyear because the in-house computer system caught almost 2, duplicateclaim submissions, which would have resulted in double payment under thecompany's old manual system (Taravella, 1984a, p. Anotherfactor is the maximum amount of probable losses. For example, a technologicaladvance may produce a new line of products for which no loss record yetexists. Tarnoff, S. Thisplan prevents the claimant from spending the settlement prematurely, andthe interest earned on the settlement is tax-free. But, as Bickelhaupt (1974) notes, "this solutioncan be used successfully by larger firms when judicious steps are taken toassure that the plan really is one of self-insurance" (p. 3). If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.