Some reporting entities may choose to self-insure all or a portion of their insurance coverage. A reporting entity that is self-insured retains the risk of loss instead of paying a third-party insurance company to assume that risk. A reporting entity generally takes on self-insurance risk because (1) the type of coverage needed is not available or (2) it believes it can administer the insurance coverage at a lower cost, either on its own or by dealing directly with a reinsurance company.
Self-insurance is essentially no insurance, leaving the reporting entity responsible for specific business risks. Examples of the types of risks a reporting entity may self-insure include:
- Liabilities that do not fall under an insurance policy as a result of policy limits
- Insurance policy deductibles
- Liabilities that do not fall under the “excess” or “catastrophic” coverage
- Experience-based premium adjustments leading the reporting entity to effectively reimburse insurers for losses
Reporting entities should accrue losses for the total cost of both asserted and unasserted claims in accordance with ASC 450. Reporting entities with significant self-insurance liabilities will most likely need to retain the assistance of an actuary when estimating those liabilities. Discounting self-insurance liabilities may be appropriate when the timing and amount of payments can be reliably estimated.
When a reporting entity has some external insurance coverage, it may need to record a receivable for insured losses, depending on the nature of the insurance contract. The reporting entity should use estimates for the insurance recoverable that are consistent with those it uses to record the liability.
Certain excess-of-loss insurance policies may require a reporting entity to pre-fund its self-insurance obligation through a trust vehicle. When this occurs, the expense for the period should not be based on the amount required to be funded. A reporting entity should evaluate whether the trust should be consolidated under the variable interest entities guidance in ASC 810, Consolidation. Often, the trust must be consolidated because the reporting entity is the primary beneficiary. See CG 2 for information on the consolidation of variable interest entities.
Insurers, including non-insurance entities that self-insure for certain risks (e.g., workers' compensation and medical malpractice), are subject to guaranty-fund and other insurance-related assessments.
