For many established businesses, conventional insurance can feel like a necessary evil, a grudge purchase that delivers diminishing value over time. Yet, the transition from traditional coverage to self-insurance is not a leap of faith but a calculated step in risk maturity.
In the past, self-insurance was traditionally reserved for major corporate organisations. The new trend is that smaller businesses, unable or unwilling to pay millions to insurers, are choosing a blended programme of traditional and self-insurance. These are the founders of businesses, entrepreneurs who have built credible businesses over the past decade. They employ between 100 and 1 000 people and are privately owned with leadership that challenges the norm.
Suddenly, they’re paying R3 million annually on insurance but have claimed only R500 000 a year. If a business looks at basic economics, it will start questioning this logic, asking: “Surely I can take on some risk myself?”
It is interesting to note that it’s often the generational businesses that have been handed down to the children that are making the transition. They’re introducing new ways of thinking, be it introducing Artificial Intelligence, new processes and products or alternative ways of insuring the business.
When does it make sense to switch?
In the early stages of a company’s lifecycle, traditional insurance is essential. It’s often mandated by lenders and acts as a financial safety net for businesses unable to absorb significant losses. However, once the company reaches a level of maturity – marked by effective risk management, financial stability, and a reliable loss history – self-insurance becomes an attractive alternative.
As brokers, we work with the company by examining their loss trends and claims history, analysing their needs, introducing risk statistics and actuarial reports, and recommending where we believe self-insurance is the better option.
It must be emphasised that not all risks are suitable for self-insurance. Catastrophic events such as fires are an example of when it would be unwise to move from traditional insurance.
Why businesses grow frustrated
Despite investing heavily in preventative measures, such as enhanced security or fire suppression systems, many companies see little to no corresponding reduction in their insurance premiums. Traditional insurers often do not offer sufficient incentives for businesses that proactively mitigate risk. It is also common practice to escalate premiums over time, which brings frustration and uncertainty to longer-term expense containment.
It is this disconnect that prompts companies to explore self-insurance solutions that offer more control, increased value, and positive returns. It means more favourable results that investors anticipate when investing in a particular venture.
Key indicators that it’s time to transition
Transitioning to self-insurance isn’t for everyone. A few critical factors must be in place:
- Predictable loss history: At least five years of consistent and predictable loss data helps to inform sound decisions.
- Financial strength: A robust balance sheet is necessary to absorb the potential impact of self-insured losses.
- Expert guidance: Access to experienced risk finance advisers is vital to structure and optimise the self-insurance framework.
- The evolution: Blending self-insurance with traditional cover.
- Rather than a straight switch, most businesses adopt a blended approach. This involves:
- Retaining conventional insurance for catastrophic events.
- Self-insuring high-frequency, low-severity risks. Everyday incidents that result in predictable claims can often be more efficiently managed internally.
- Addressing previously uninsured risks. Some exposures, such as credit risks or product warranties, are either too costly or not covered by the market. Self-insurance offers a viable solution here.
- Adjusting excess levels. Increasing deductibles can yield significant savings while effectively shifting part of the risk to the business itself.
Contingency policies: The bridge to self-insurance
One of the most practical tools for transitioning to self-insurance is a contingency policy, often referred to as a “rent-a-captive”. This is a standard insurance policy, designed to underwrite self-insured risks, while allowing the business to share in underwriting profits if claims are low.
Contingency policies usually work in conjunction with traditional insurance programmes and ensure no gaps in coverage. Over time, they allow businesses to build internal risk reserves, making them less reliant on external insurers and more capable of negotiating favourable rates. Basically, they create a mechanism for you to ring fence funds that you can dedicate for use for self-insured losses.
Contingency policies work for the following reasons:
- Strategic risk management tool. They enable better control over risk exposure, loss trends and funding
- Flexible design. They are easily tailored to suit different structures, premium levels, and reinsurance strategies.
- Cost-effective. Unlike captives, they require no upfront capital and offer low operating costs.
- Off-balance sheet profits. Underwriting profits are retained without impacting company financials.
- Investment growth. Positive balances can generate interest income.
- Premium efficiency. Premiums are deductible business expenses, adding further financial efficiency.
The decision to move from conventional insurance to self-insurance is a sign of business maturity, one that recognises risk as an asset to be managed, not merely transferred. With the right structures and advisory support in place, self-insurance empowers companies to take greater control of their financial destiny, reduce dependency on insurers and even turn risk management into a source of profit.
Richard Hood is the chief executive of OLEA South Africa.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article is not intended to be, nor should it be regarded as, a substitute for insurance or risk-management advice from a suitably qualified broker.
