insurance

Self-Funded Insurance

A type of insurance arrangement where an organization assumes the financial risk for providing benefits to its members, rather than purchasing traditional insurance policies. The organization pays claims directly from its own funds, often with the help of a third-party administrator, and may purchase stop-loss insurance to limit catastrophic losses.

Example

“The large corporation switched to a self-funded health insurance plan to better control costs and retain any savings from lower-than-expected medical claims.”

Memory Tip

Think 'Be Your Own Bank' - instead of paying an insurance company, you're banking money to pay your own claims.

Why It Matters

Self-funded insurance can provide significant cost savings for large organizations by eliminating insurance company profits and administrative margins. It also offers more control over benefit design and claims data, allowing for customized health and wellness programs that can further reduce costs over time.

Common Misconception

Many people think self-funded insurance means no protection against large claims, but most self-funded plans purchase stop-loss insurance to limit their exposure. Another misconception is that only huge corporations can self-fund, when many medium-sized employers (100+ employees) successfully use this approach.

In Practice

ABC Company with 500 employees was paying $800,000 annually in health insurance premiums. They switched to self-funding, budgeting $600,000 for expected claims, $50,000 for administration, and $75,000 for stop-loss insurance protecting against claims over $100,000 per person. In the first year, actual claims totaled $520,000, so their total cost was $645,000 ($520,000 + $50,000 + $75,000), saving $155,000 compared to traditional insurance while providing the same benefits to employees.

Etymology

The term emerged in the mid-20th century as large employers began to 'self-fund' their insurance programs rather than paying premiums to insurance companies, keeping the funds 'in-house' to pay claims directly.

Common Misspellings

Self-Funded InsurenceSelf Funded InsuranceSelf-Fundded InsuranceSelf-Funded Insureance

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