The Realities of Self-Insurance: A Sophisticated Risk Management Assessment

With the mounting costs of homeowners and property insurance, many are considering self-insurance as a potential solution. As risk managers, we believe self-insurance can be a viable option in certain contexts, but when does it transform from a calculated decision to a hasty impulse?

Before we delve deeper into self-insurance, let’s discuss when self-insurance is not a potential solution. Self-insurance is seldom an option when there is a loan because the lender will require insurance.

Understanding Self-Insurance

Self-insurance is no trivial matter. It demands serious thought and thorough planning. Let’s understand its types:

  • Passive Self-Insurance: Involves simply not purchasing insurance, not unlike an ostrich burying its head in the sand, or a middle finger to insurance companies.
  • Active Self-Insurance: Refers to a strategic plan devised to retain and manage specific risks of loss.

Individuals choose to forgo insurance for a variety of reasons:

  1. High premium expenses.
  2. Unaffordable premiums.
  3. Underestimation of risk.
  4. Belief that significant loss is unlikely.

Let’s delve deeper into these considerations:

Evaluating Costs

When assessing premium costs, it’s imperative to balance the expense of transferring risk via insurance against other potential options. Here are some essential factors to consider:

  • Your Personal Risk Tolerance: While some find solace in insurance’s security, others are more accepting of the unpredictable ebb and flow of life. The comfort and cost of security or the uncertainty of risk are very personal considerations.
  • Preventative Measures: A strategic self-insurance approach may involve spending on protective measures like impact-resistant glass or a resilient roof to mitigate hurricane damages.
  • Long-term Strategy: Self-insurance is a financial journey, not a fleeting decision. All potential savings and expenses should be evaluated over a prolonged period.
  • Financial Preparedness: An effective self-insurance plan demands reserves for standard losses and adequate funding for catastrophic events.
  • Hidden Aspects: Self-insurance isn’t merely about abstaining from buying insurance. There are tangible and intangible costs associated. Consulting a knowledgeable professional can provide clarity.

Affordability Concerns

Merely being uninsured isn’t the equivalent of self-insurance. The unfortunate reality is that in Florida many cannot afford adequate insurance due to higher priorities, inflated costs, or necessities. For those with the option to choose between insuring and self-insuring, consider:

  • The nature of self-insurance you desire, passive or active.
  • The maximum amount you’re willing to lose in a self-insured event.
  • The level of financial loss that would shift your lifestyle or threaten financial security.
  • Your financial partner’s stance on risk tolerance.

Effective self-insurance involves meticulous planning and a genuine commitment.

Recognizing Risk Exposure

Do you fully understand the extent of what you’re self-insuring? Large corporations usually have clear answers, but individuals and small businesses seldom understand their financial risk exposure. Before choosing self-insurance, arm yourself with knowledge and, if necessary, seek professional guidance. Contact us for a worksheet to calculate your total risk exposure.

Challenging Overconfidence

It’s easy to slip into a mindset of invulnerability based on past experiences or preconceived notions. However, potential risks like natural disasters or unexpected accidents are real and unpredictable. Complacency is a luxury none can afford when it comes to such stakes.
We often hear people say that they feel safe because their home is several miles from the ocean. Hurricane Lee recently contained a wind field of over 350 miles in diameter; it is important to understand the real risk exposures.

Remember, life is filled with uncertainties. While we cannot avoid every risk, we can strategically manage them and make informed choices.

Lee Burke, CRM, CIC in association with Stacey Zambory and Andrew O’Neill

Burke Bogart & Brownell, Inc. is a 50-year young Independent Insurance Agency.
BB&B serves Real Estate and Legal Professionals in all areas of Real Estate transactions.
The agency provides educational information as a professional courtesy and consumer benefit.
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