Accounting Standards for Self-Insured Companies Chron com

accounting for self insurance

You must also estimate the costs for their medical care and set aside an equal sum of money to tap into should any employee need to cover healthcare costs. On top of that, you will have to navigate the complexities of health, age, and disability discrimination, as mistakes in handling these will lead to costly legal battles. An actuarial report is often the primary evidence supporting a company’s unpaid claim estimate; however, not all actuarial reports are created equal.

accounting for self insurance

The smaller your business, the more likely it is that you’re at least considering self-insurance. Very small businesses find it difficult to get affordable health insurance for their employees and look to self-insurance as an option. For small businesses finding it challenging to get affordable health insurance for their employees (which can especially be the case if they’re not using an HR or payroll service), let’s take a look at how self-insurance works. Although you may avoid regularly increasing premiums with this option, we do not recommend that small businesses self-insure. The financial risk is simply too great, and for most businesses, the cons vastly outweigh the pros.

To calculate your self-insured premiums, you’ll need to work with your benefits broker and TPA. They’ll take your company census and look at any existing health problems your employees may have. Essentially, they’re assessing the risk you’re taking on by insuring your employees.

How to Account for the Employee Portion of Health Insurance Premiums

This timing difference is often substantial as many claims take years before reaching a settlement. Another often unrealized benefit ― self-insurance can make businesses more aware of risks and increase incentives for stronger risk control when it directly affects profit. In self-funded health care, the employer ultimately retains the full risk of paying claims, whereas when using insurance, all risk is transferred to the insurer. Accounting for self-insured liabilities is a complex process, so having an actuary who understands the requirements and standards is key. It is worth investing time and resources into the actuarial process, including estimating liabilities, as a solid analysis generally decreases a company’s chance of incurring additional time and audit costs down the road.

Sign up to receive more well-researched small business articles and topics in your inbox, personalized for you. As a native Californian, artist, journalist and published author, Laurie Brenner began writing professionally in 1975. She has written for newspapers, what is the debt to total assets ratio magazines, online publications and sites. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. You can set the default content filter to expand search across territories.

  1. These principles form the foundation on which companies, especially publicly traded ones, base their financial reporting.
  2. To that point, the colloquial use of “self-insurance” is generally used throughout this article unless specifically stated.
  3. The benefits broker will also help you find a third-party administrator (TPA), which manages your healthcare plan, ensures compliance, and deals with all claims.
  4. Consequently, most self-insured entities still obtain insurance to cover the risk of catastrophic losses, while covering all smaller incidents themselves.
  5. Essentially, they’re assessing the risk you’re taking on by insuring your employees.

Without a TPA, your internal HR team or a dedicated staff member will process healthcare claims for their colleagues. While the individual may be trustworthy and keep all medical information confidential, other employees may feel uncomfortable and not participate in the plan. If the individual processing claims isn’t trustworthy, that could lead to employee lawsuits if the individual breaches confidentiality or shares medical information. You are generally not involved in the administration of your self-insured healthcare plan.

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With first dollar coverage, the insured has no financial pressure in the form of deductibles or retentions; however, many businesses retain a portion of the financial risk of loss instead of purchasing first dollar insurance. Retained risks often include claims related to medical plans, medical professional liability, worker’s compensation, auto liability, and general liability exposure. The financial statement auditor’s evaluation and conclusion on the recorded estimate are generally supported based on analysis prepared by the company’s actuary. One aspect is management’s involvement in and understanding of how the actuarially driven estimate was determined. While a well-documented actuarial report will provide a basis for that understanding, the ability to readily communicate with the actuary is sometimes necessary and often the more efficient route with external auditors. These challenges are inefficient, inconvenient and may reveal control deficiencies within an organization.

accounting for self insurance

In other words, the retailer will be on its own and will not be able to turn to an insurance company to take care of the problem. In times of uncertainty and financial stress, it seems increasingly important for the insurance sector and broader financial services industry to maintain connections and be well-positioned to serve clients. Under US GAAP and GASB, management should record its best estimate of claim liabilities without a margin for the risk of adverse deviation. In practice, management generally records its specialist’s actuarial central estimate or an amount within a reasonable range of that estimate.

Self insurance definition

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. These materials were downloaded from PwC’s Viewpoint ( under license. The fintech landscape is rapidly evolving, presenting challenges and opportunities in equal measure. Read BDO’s 2024 Fintech Predictions to learn more about what to expect, from asset tokenization to distressed dealmaking and more. Although technically more narrowly defined, the term “self-insurance” is commonly used to capture a wide variety of retained risk mechanisms. To that point, the colloquial use of “self-insurance” is generally used throughout this article unless specifically stated.


To help avoid this stress and build a strong control environment, companies should establish processes to estimate these liabilities. This article is the second in a three-part series that provides insight from our actuaries into how companies can design such an estimation process to account for the self-insured balance and utilize tools to gauge how well it is working. Read on for more about common pitfalls in the estimation process and how a robust self-insured accrual is determined. Additionally, self-insurance provides cash flow advantages when payments are made over the life of the claim instead of paying premium costs up front. The company can invest the difference in the growth of the business or in its investment portfolio.

This article is the first in a three-part series designed to help interpret self-insurance liabilities and to challenge how well the estimation process is working. Read on to understand why companies self-insure and what this balance represents. If your company operates in an industry where employees may suffer frequent injuries, like construction or demolition, you may also consider self-insurance as a way to help reduce high premiums.

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