The value of self-insurance

When Malcolm Wilson, Housing Association specialist for Overark, first started exploring the possibility of using a self-insurance vehicle for his Housing Association he was looking for consistency and certainty of premiums.

Having been quoted a significant premium increase at renewal by his insurer, Malcolm wanted to reduce his Housing Association’s exposure to insurance market cycles. He wanted to pay a premium based on his own organisation’s experience and to retain the benefits of his own proactive approach to risk management.

By self-insuring predictable losses and insuring larger, more catastrophic claims in the commercial market, he then had access to a wider array of underwriters than would previously have been the case.

“When you self-insure”, he explains, “you insulate yourself to a significant extent from insurance market shocks, and you manage your own costs. The money that you save – that previously would have been paid out in insurance premium that may then never have been needed to pay a loss – can instead be used for risk mitigation efforts.”

“Using a self-insurance vehicle, such as a protected cell company (PCC), really is a long-term solution”, he continues, “and not just a way to save money on premiums. It also makes loss patterns much more visible, and this gives all employees a much greater incentive to play their part in working to reduce claims activity and as a result risk expenditure.”

Overark founder and managing partner Peter Berring highlights the important stabilising effect that PCCs can bring. “Once you take a self-insured retention, then the premiums you pay for your insurance become far more stable, he explains. “And the claims that fall within that self-insured retention become more predictable, with the more volatile, high-severity claims insured into the wider insurance market.”

Protected cell companies are not a new phenomenon, with their origins stretching back 20 years to the introduction of the first PCC legislation in Guernsey. The domicile is in fact where Overark has chosen to locate its own PCC Caucus Intelligent Risk PCC, set up exclusively for Housing Associations.

“The Guernsey insurance regulator, the Guernsey Financial Services Commission, has established a market-wide reputation for being secure and professional,” notes Peter. “And the island boasts both good legislative processes and deeply experienced personnel.” The latest figures show that at the end of 2015, Guernsey had 65 protected cell companies comprised of 444 cells.

These self-insurance facilities have become a widely recognised and valued component of effective risk financing by many successful organisations.

“Most FTSE 250 companies have a cell or a captive insurance vehicle,” Peter points out. “And there is every reason for Housing Associations to use this approach too. You gain more control over your business and it gives you access to catastrophe reinsurance experts.”