> Could you explain more about how self insuring works?
In normal insurance, the policy payments go into an investment pool that benefits the corporation's stockholders. In self-insurance, the set-aside funds go into an investment pool that benefits you (or your company).
The drawback to self-insurance are outlier claims that can more than wipe out the set-aside (as in the case under discussion). Obviously an insurance corporation has (or should have) a larger pool to deal with outliers than an individual or small company.
This is not to say that big insurance companies aren't sometimes wiped out by a sudden unexpected uptick in legitimate claims. In that case, the company may simply declare bankruptcy and the policy holders are left out in the cold -- just as though they had self-insured. But that's a rare occurrence.
The problem with a self-insurance plan re-insuring is that it undermines the very reason for the self-insurance -- it erodes the advantage of local investment of the set-asides.
But not totally, and would presumably protect against catastrophic catastrophes by spreading the meta-risk.
You could make the same argument against having home or medical insurance, that it erodes the advantage of having the totality of your take home pay. But it seems responsible to have home insurance and medical insurance, and it would seem responsible for a self-insurer to reinsure.
The problem with re-insuring is it's not one thing and its not the other. The advantage of self-insurance is diminished, and the advantage of conventional insurance is diminished also.
> it would seem responsible for a self-insurer to reinsure.
Reinsuring is sort of like being married, and not being married, at once. Many people think that sounds pretty cool -- until they try it.
Reinsurance policies can be pretty bespoke; you could for instance get a policy that only covers you in the event that a tornado hits corporate HQ (=> driving corporate revenues down and healthcare costs up at the same time), or individual payments above a certain amount, or N% of aggregate claims above a certain level. You still preserve most of the benefits of self-insuring while protecting yourself against outliers, in the same way that you come out ahead if you skip insuring the loss of your refrigerator, but do insure the loss of your house.
The biggest issue is the principal-agent problem - it costs some amount to insure against once-every-20-year claims, and by that time the CEO is likely to be retired, so why buy the coverage?
That's one of the reasons why insurance companies per se are highly regulated.
yes. every self insured company I've known re-insures. When you get to the size of Wal-Mart, perhaps you don't bother. For smaller employers, reinsurance (also called stop loss) is a major cost
> How often do self-insuranced companies run out of their set-aside?
I don't have any figures at my fingertips, but I know it's more often than insurance corporations, which are highly controlled by governmental oversight to prevent that very thing.
> When that occurs, do their employees simply go without health care?
Yes, that's exactly what happens. Sometimes instead, a company will stop offering in-house insurance and require employees to seek insurance elsewhere.
It sounds like working for a self-insured company is strictly worse for employees than working for a company that offers insurance through an insurance company, risk-wise.
Not "strictly worse", because if one cares about maximizing profits for the company and wages for the employees, the self-insurance route might be better overall. Formal insurance arrangements can be a real drain on resources. On the other hand, some companies choose to self-insure without fully appreciating the risks.
How serious are the risks to the company's other assets? Can a company limit the damage to its other assets if the money it set aside for insurance gets used up?
> Can a company limit the damage to its other assets if the money it set aside for insurance gets used up?
Yes, but at risk of civil lawsuits from the insured, who might have a different perception of their coverage. This kind of thing actually happens, often based on an implied contract between the employer and the staff that may have never been fully committed to paper.
In normal insurance, the policy payments go into an investment pool that benefits the corporation's stockholders. In self-insurance, the set-aside funds go into an investment pool that benefits you (or your company).
The drawback to self-insurance are outlier claims that can more than wipe out the set-aside (as in the case under discussion). Obviously an insurance corporation has (or should have) a larger pool to deal with outliers than an individual or small company.
This is not to say that big insurance companies aren't sometimes wiped out by a sudden unexpected uptick in legitimate claims. In that case, the company may simply declare bankruptcy and the policy holders are left out in the cold -- just as though they had self-insured. But that's a rare occurrence.
More here: http://arachnoid.com/wrong/index.html#Insurance