23 February 2006

Self-insuring?

Carlos asked:
"What is involved in having a group self-insure?"

We looked pretty seriously into this in 2002 and 2003. The short answer is that you generally need a bigger practice than ours to make the economics work out. The consultants we used opined that a 100-physician base would be the "critical mass" at which it would make sense. We are one of the larger ED groups, at 35 docs, so it would have been tough to find enough other docs to form an alliance with to create our own risk retention group.

The advantages of your own insurance are huge:

  • Direct access to the reinsurance market
  • Strong incentive for internal risk management
  • Capital growth opportunities*
  • Premium reduction in the future*
* Assumes that you do manage your risk well and that your loss experience outperforms the actuarial analysis. The risk, of course, is that if you have a bad loss experience, well, you're playing with your own dollars.

The financial cost of starting up a self-insurance program is substantial, and generally is the largest obstacle. There is the need to capitalize the reserves, which can be substantial, and of course the need to pay lawyers and actuaries and consultants . And the administrative hassle is also significant -- you need to go to somewhere where the insurance laws are favorable -- Bermuda and Hawaii are popular -- and incorporate there, and find the folks to set up and manage the structure, and go there to oversee the operations on a regular basis.

So for us, the financial obstacle was the main reason we did not, but we are also pretty stretched thin on the administrative side. In retrospect, we have had a very very good loss experience, so I wish we had done it. We would be sitting on a huge pile of cash with much lower premiums now. Oh well. Maybe in the future this is something we can create.

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