The Self-Insurance Concept
Our previous article dealt with “Loss Ratios” and Risk awareness generally and the growing need to consider ways and means of dealing with the concept of self-insurance in the light of a hardening insurance market and the increasing cost of insurance.
1. The “EAT” Principle
We said there are basically three ways of dealing with “risk”
• Eliminate risk by cost effective risk management and loss control;
• Absorb risk by strategic structuring;
• Transfer the risks which present an unacceptable impact on your financial planning.
2. The “One Rand Pie”
This article will focus on the “A” and “T” of the EAT principle. Motor insurance, for example, presents an ideal opportunity for well-structured self-insurance where there is a large fleet of motor vehicles and therefore delivers a high incidence of motor claims.
3. Premium Wastage
The “One Rand Pie” graphic above demonstrates the principles Insurers apply when quoting on motor fleet insurance. Sixty percent goes to provision for anticipated claims and forty percent is allocated to costs.
4. How Insurers Work
With a three year claims experience on the motor claims and after making due allowance for inflationary trends, they apply the 60/40 principle and the final result tends to be expensive for the fleet owner who only gets sixty cents value for his rand.
5. The “Aggregate Pot” Solution
Garrun suggests that the insured self-insurers his anticipated motor claims thereby getting a rand for rand value for motor claims. Should claims exceed the Aggregate Limit or Pot during the insurance period, Insurers pick up the “Pot Spillage.” Other techniques are used by Garrun to protect the “Pot” against individual large losses where Insurers participate whether the Aggregate “Pot” is fully utilised.
6. Rand Swapping
This concept explains the cost of insuring highly predictable losses i.e. high frequency and low severity. A good example of this is geyser insurance on buildings. Insurers tend to increase their premiums to make provision for predictable geyser claims which are generally low severity and high frequency. Garrun suggests these type of incidences should be carefully analysed and possibly regard as maintenance costs in return for lower premiums on the building itself. This makes all the more sense when one considers the regular adjustments that are made to maintain the correct replacement value.
7. A “win/win” Situation
Garrun specialise in approaching risk by carefully analysing the Loss Ratios and the claims experience detail and this ultimately results in lower premium and an improved “Loss Ratio”. This is a “win – win situation”.
Speak to your local Garrun broker for more detail or contact your nearest Garrun Branch to arrange a risk assessment and advice htpps://www.garrun-group.co.za/site/contact-us