When it comes to protecting your valuables or your business, you can’t beat a bespoke and comprehensive insurance policy. But some individuals and business owners prefer to take a DIY approach to cover, and instead choose the self-insurance route.
In this post we’ll discuss what self-insurance is, and how it works. We’ll also outline the benefits, along with the potential risks, of a self-insurance arrangement.
If you’d like to discuss your cover needs with an insurance specialist, we’re always happy to help. For more information, call us on 0208 290 7779, or email personal@anthonyjones.com.
What is Self-Insurance?
Self-insurance involves individuals or businesses putting some of their own money aside in a sort of emergency fund, to cover potential future costs such as:
- Medical bills
- Emergency home renovation
- Car repairs
- Business interruptions
Unlike a personal or business insurance policy, where you pay an insurance company a premium to cover you for a set of specified risks. If you experience a loss, you can then make a claim on your policy, and your insurer will give you a settlement to cover your costs.
Self-Insurance vs. Uninsured
There’s a difference between being self-insured, and being uninsured.
If you’re self-insured, you are taking steps to manage your exposure to risk, through putting away a certain proportion of your income each month.
If you’re uninsured, then you have no emergency fund, and no contingency plans for unexpected circumstances. If something goes wrong, you’ll be wholly unprepared to face it.
Benefits of Self-Insurance
There are several potential advantages to choosing self-insurance:
- It can be cheaper. Putting aside a certain proportion of your income can be more affordable than paying monthly or annual premiums on an insurance policy.
- It can be more flexible. With self-insurance, the money you put aside can cover any cost, whether it’s to repair flood damage or to pay for dental treatment. An insurance policy will only cover you for a specific set of risks, and there are usually cover limits and exclusions.
- It can be quicker. With self-insurance you can access the money you need to cover your expenses almost immediately. With a personal or business insurance policy, you will first have to make a claim, and then wait for your insurer to consider the issue before they give you your settlement. There is also the risk that your claim will be unsuccessful, or that you’ll need to meet costs that are not covered by your policy.
- It can be more cost-effective. Take out an insurance policy and you’ll pay a premium that covers you for a number of events that may never happen. Similarly, the cost of a potential claim may be significantly less than the amount you pay for cover. Depending on the likelihood of the risk, and the possible costs it may incur, self-insurance may prove more cost-effective than certain insurance policies.
Risks and Limitations of Self-Insurance
While there may be benefits, self-insurance can come with significant risks:
- Legal requirements. Self-insurance cannot cover you for all risks, as you have a legal requirement to get some forms of cover. For example, you probably need to get home insurance as part of your mortgage agreement. If you drive, then by law you need to get at least third party car insurance. If you hire staff, then you must get employer’s liability insurance.
- Your emergency pot might not be big enough. Yes, insurance policies have cover limits and exceptions. But they will still cover you up to a certain amount for all specified risks. A home insurance policy, for example, may cover you for the total rebuild value of your home. Self-insurance may be fine for smaller expenses. But for bigger expenses, an insurance policy will be a lot more reliable.
- Lack of risk expertise. If you don’t fully grasp your exposure to risk, then self-insurance will likely leave you underinsured. Insurers can help you understand and manage the risks you’re facing, and they can tailor a policy to give you all the cover you need at a good price.
- No access to additional support. As well as giving you a cash settlement to meet your costs, insurers can liaise with other parties on your behalf, and they can even manage some of the admin you’ll face following an emergency. With self-insurance, though, you’ll have to manage every aspect of your recovery yourself.
Is Self-Insurance Right For Me?
It’s certainly possible to save money with a self-insurance approach to risk management. But in the vast majority of cases, the risks of self-insurance significantly outweigh the benefits.
Ask yourself:
- Can you afford to cover a major loss out of pocket?
- Do you understand the risks you’re exposed to and able to keep up with this knowledge?
- Are you legally required to have certain types of insurance?
If you’re unsure, it’s best to consult with an insurance expert.
If you do opt for self-insurance, it must be a conscious choice. Self-insurance is only a good idea when you’re fully aware of the risks you’re dealing with, of the costs you’ll have to meet, and of the work you’ll have to undertake.
Need Help Choosing the Right Insurance Cover?
There are reasons why you might choose to take the self-insurance route. Maybe you feel your premiums are too high. Or maybe you think that your policies won’t cover you for all risks, so you think it would be better to save up so you can choose where your money goes.
This is where an insurance broker can help. Whether you’re a private individual or a business owner, we can help you understand the risks you’re facing, and how you might manage or mitigate them. We can then help you get the comprehensive, tailored cover you need at a truly competitive price – so you won’t ever feel like you’re paying too much for cover you don’t really need.
If you’d like to discuss your cover needs with an insurance specialist, we’re always happy to help. For more information, call us on 0208 290 7779, or email personal@anthonyjones.com.
