SELF INSURANCE AND HOW IT WORKSmoneywise.adventist.org/files/WAD_self_insurance_240.pdfGiles Barham...

SELFINSURANCEANDHOWITWORKS

Presentedby:GilesBarhamBSc.MSc.ACCA,CII(Cert)

PrinciplesofBiblicalStewardshipadaptedfromhttps://tifwe.org/four-principles-of-biblical-stewardship/ Author:HughWhelchel

1. Principleofownership–– “TheearthistheLORD’s,andeverythinginit,theworld,and

allwholiveinit”Psalm24:1

2. Principleofresponsibility–– “AlthoughGodgivesus“allthingsrichlytoenjoy”nothingis

ours.Nothingreallybelongstous.Godownseverything;we’reresponsibleforhowwetreatitandwhatwedowithit.Whilewecomplainaboutourrightshereonearth,thebibleconstantlyasks,Whataboutyourresponsibilities?Ownershaverights;stewardshaveresponsibilities.”TheHighCalling,BillPeel,2008Accessed:https://www.theologyofwork.org/the-high-calling/blog/not-ownership-responsibility-leadership-stewardship-part-2

PrinciplesofBiblicalStewardshipadaptedfromhttps://tifwe.org/four-principles-of-biblical-stewardship/ Author:HughWhelchel

3. Principleofaccountability–– Weareallstewardsofresource,abilitiesandopportunities

thatGodhasentrustedtoourcare,andonedayeachoneofusmustbecalledtogiveanaccountforhowwehavemanagedwhattheMasterhasgivenus.E.g Parableoftalents

4. PrincipleofReward–– “Whateveryoudo,workatitwithallyourheart,asworking

fortheLord,notformen,sinceyouknowthatyouwillreceiveaninheritancefromtheLordasareward.ItistheLordChristyouareserving”Colossians3:23-24

Howcanweapplytheseprinciples?

–Wedoliveinadangerousworld

– Therearerisks

–Weshouldbewisewhilebeingcaring

Pelandaba PrimarySchoolinBulawayo– ZimbabweSecurityguardsavagelyattackedJanuary2017

Whatisrisk?

• Riskistheexposureofasubjecttoelementsofuncertainty orunpredictability toafavourable orunfavourable eventualitywhichsometimesincludesdanger.

– E.g.Riskcarwillbestolen– Riskofcaraccident– Riskofinjuringothersasresultofcaraccident– Riskofdamagetocarcausedbyanotherdriver

Whatisinsurance?

• AmechanismfortheTransferofthesaidriskfromtheinsuredtoathirdpartyinsurancecompany.

• Theinsuredisabletotransfertheuncertaintyofafutureunknownpotentialrisk/costinexchangeforthecertaintyofafixedpremiumcost.

Linkbetweenriskandinsurance

Insured(WAD) Insurer(ARM)

PaysPremium

RiskTransferred

Asaresultofthisrelationship, insureragreestopayforloss,damageorliabilityasdefinedbythepolicyterms

EXAMPLESOFRISKOURCHURCHINWADFACES1)Reputational2)Donations3)Life4)PhysicalAssets

BuildingValuesVehicles

5)Catastrophic

DoesWADneedinsurancethough?5Yearpropertyanalysisto10th June2017

“Wedon’tmakeclaims!”

Principlesofinsurance

• Inordertobeinsurable,arisk:

– Mustbeafortuitous event– Musthaveaninsurableinterestfromtheinsured– Mustnotbeagainstpublicpolicy

Principlesofinsurance

• Providespeaceofminddependingonriskappetite

• Poolingofrisks– Lossesoffewwhosuffermisfortunearemetbymanywhoareexposedtosimilarpotentialloss

• Equitablepools– anumberofpoolssetup,oneforeachmaingroupofrisks

WhatisSelfInsurance?

• Involvesformaldecisiontoretainriskratherthaninsureit

• Selfinsuranceistheactofnothavinginsuranceatall.

• Theprinciplesofselfinsurancearethatyouwouldcreateareservefundandpaythebillsthattheinsurancecompanywouldusuallycoverfromthesaidreservefund.

WhatisSelfInsurance?

• Requirescarefulplanning• Allocationofspecificresourcese.g.poolsoffunds

• Allocatedfundwithcashreservestobackitup• SelfInsuranceplandocument• Protocolsforacceptance/denialofclaims

SelfInsurance- Thingstoconsider:• Bigclaims• Claimfluctuations• WhichLinesofbusiness?• Expertise/knowledge• Staffingcosts• Currencyexchangeissues• Wherefundsareheld(Country)• Ratestobecharged• Objective/impartialclaimshandlersi.e.dangersofnepotism• Longtermcommitment

– Planstypically“requireathreetofive-yearimplementationperiodbeforeyourcompanytrulyreapsanyrewards”https://theolsongroup.com/pros-cons-self-insurance/

– Expensiveandtimeconsuming

Whatdoespolicystate?

“Fundedself-insuranceprogramstocoverexpectedlossesareacceptableriskfinancingtechniques.However,theexpectedlossprojectionsshouldbebasedonanactuarystudyandshouldhaveexcessinsurancecoveringthecatastrophicexposure”

GCWorkingPolicy2015-2016,S6005,p493

Whatisanactuarystudy?

• “Thescienceofapplyingmathematicalandstatisticalmethodstoassessriskininsurance,financeandotherprofessions.”

• IntheUSA,theseservicescantypicallycost$10,000-$15,000perannumbasedoncomplexityofanalysisandlineofbusinessquantity.

• Asaresultofthestudy,clientcanbeadvisedhowmuchcontributioneachbusinessunitshouldmaketothepooledfund.

WhatisExcessinsurance?

• Actofenlistingthirdpartyinsurancecompanyforhigherlevelsofcoverageintheeventofawholesaleloss.

• E.g.Thirdpartyinsurancepolicytakenoutforalllossesinexcessof$150,000.Effectis:– LowerPremium– Thirdpartyinsurercoversanylossinexcessof$150,000

Principleofexcesscoverage• Theinsured(WAD)istherefore

responsibleforadministrationofclaims,chargingandreceivingpremiumsfromterritoryandproducingguidelinesandpolicydocumentsforallclaimsuptothevalueof$150,000.

• TheExcessInsurerwouldsupporttheinsuredwithanycatastrophicclaims

• e.g.awholeuniversitycampusburnsdownwhichcost$1.2milliontoreplace.Theinsuredwouldpay$150,000aspertheirpolicytermsandtheinsurerwouldpaytheremaining$1.05million

WADretainsanyclaimsuptosay$150,000

ARMoranotherinsuranceprovider

providescoverforportion oflossesinexcessof$150,000

ProsandConsofselfinsurance

Benefits• Customised Plans• ImprovedData• Potentiallowercosts• PotentialLowerpremiums

Drawbacks• Provisionofservices• IncreasedRisk• Recession/Weakeconomic

cycle/claimfluctuation• Muchcapitaltiedup

unproductivelyshouldclaimsneedtobepaid

• Cashreservestaketimetobuildup

Howtosetupaselfinsuranceplan• Considerwhichlinesofbusinessi.e.Property,car,householders,etc.

• CreateSelfinsuranceplandocument• Engagewithactuarywithlosshistoryandfactfindinformationtheyrequire

• Actuarywilladviseonvalueofcontributionfromparticipants(premium).

• Administratorsofthefundwillneedtoestablishmarkuptocoveradmin

• Setasidehumanresourcetomanagefund

Howtosetupaselfinsuranceplan(2)

• Createcomplexpolicydocumentsandwordingclearlyindicatingperilscovered/notcovered

• Collectcontributionsfromvariousentities• Thosewithgreaterrisks(e.g.morebuildings/greaterbuildingvalues)equatetogreatercontribution

Howtosetupaselfinsuranceplan(3)

• Contributionsmustbeplacedasanallocatedfund/sonfinancialstatementsandmustNEVER betouchedforanyotherpurpose

• Potentiallyopenupaseparatebankaccountforeachlineofbusiness(pools)

• Anyexcessinpoolatyearendtransferredtoreserves

• Claimsdealtwithbytrainedemployeesstrictlyadheringtopolicyguidelines

THECULTUREOFSAFETYANDRISKMANAGEMENTSTARTSWITHTHE

LEADERSHIPOFANYORGANIZATION

RISKMANAGEMENTSHOULDBEPART OFMINISTRY,ITISNOT IN

CONFLICTWITHMINISTRY.

IsARMaself-insurancecompany?

• AdventistRiskManagementis,forallintentsandpurposes,aselfinsuranceprogram.

• ThisindicatesthattransactingwithARMandmakingcontributionsisinharmonywithstatutorylegislationinvariouscountriesstatinginsuranceshouldnotbepurchasedoutsidethecountryborders.

MCDERMOTTWILL&EMERYLAWFIRM

BasedonU.S.federaltaxlawandstateinsurancelegalauthorities,itisreasonablefortheSeventh-dayAdventistChurch(the“Church”)totakeapositionthattheactivitiesofGENCONInsuranceCompanyofVermont(“GICV”)donotconstitutethebusinessofinsurance. Applyingthesegeneralprinciples,thispositioncanbeextendedtotheChurch’sthirteeninternationaldivisions.

MCDERMOTTWILL&EMERYLAWFIRM

Thisresultderivesfromfundamentaleconomicprinciples,thetwomostimportantofwhichare(i)that“self-insurance”is“self-funding”whichisnot“insurance”butratherinthenatureofadepositand(ii)that“insurance”requiresdistributingriskexposuresamongasufficientnumberofseparateunrelatedpartiestoinvoketheactuarial“lawoflargenumbers”sothatnoonememberofanaffiliatedgroupissubstantiallypayingforitsownlosses.GICVfunctionsasaself-fundingvehiclefortheChurchanditstax-exemptaffiliates.BecauseGICVfundsnolossexposuresofanyoutsideparties,itdoesnotoperateasatraditionalrisk-bearinginsurer.Caselawandlegislativehistory-supplieddefinitionsof“commercialtypeinsurance”wouldnotincludeGICV’s activitiesbecauseallthefundedrisksareattributabletotheChurchanditscontrolledaffiliates.

ARMself-insuranceSummary

• AdventistRiskManagementwillONLYinsurechurchownedorganisations,employeesandmembersonchurchbusiness.

• AslossesareonlysettledthroughchurchfundedpremiumstheministryofARMisself-insuringSeventh-dayAdventistchurchrisks.

OptionsAvailable1. Attempttoselfinsure(notpolicyendorsed)2. Selfinsurewithexcessinsurancesupport(policy

endorsed)3. SelfInsurewithoutsourcedadministration

function(policyendorsed)4. InsurethroughARM(policyendorsed)5. InsurethroughaproviderotherthanARM

“whichisgivenasuperiorratingbyawell-knowninsurancebrokeragehouseapprovedbyAdventistRiskManagement,Incorporated”(policyendorsed)

EverythingbelongstoGod

• “LORDourGod,allthisabundancethatwehaveprovidedforbuildingyouatempleforyourHolyNamecomesfromyourhand,andallofitbelongstoyou.”1Chronicles29:16

–Weare stewards/faithfulandresponsibleservants

–Weshouldbewiseandcaring(Matt10:16)

QUESTIONS?

Giles.barham@adventistrisk.org

THIS POWER POINT PRESENTATION AND ANY MATERIALS DISTRIBUTED ARE FACT BASED GENERAL INFORMATIONAND SHOULD NOT, UNDER ANY CIRCUMSTANCES, BE CONSIDERED SPECIFIC LEGAL ADVICE REGARDING APARTICULAR MATTER OR SUBJECT. PLEASE CONSULT YOUR LOCAL ATTORNEY OR RISK MANAGER IF YOU WOULDLIKE TO DISCUSS HOW A LOCAL JURISDICTION DEALS WITH ANY SPECIFIC CIRCUMSTANCES YOU MAYBE FACING.