Interpretation of traditional insurance companies

As a way of enterprise risk management, if it can reduce the risk cost of enterprises and bring long-term benefits to enterprises, it is not only desirable to establish professional self-insurance companies to replace traditional commercial insurance. Analyze the advantages of establishing a professional self-insurance company from the following four aspects.

(A) insurance cost analysis

First of all, due to the "adverse selection" problem in the traditional commercial insurance market, some insured low-risk enterprises have to bear the average rate higher than the reasonable rate. Because of information asymmetry, that is, the insured company is more aware of the possible loss compensation risk than the insurance company, so these low-risk companies change their unfavorable position in the traditional insurance market by establishing their own professional self-insurance companies as a new risk financing arrangement. In this sense, the establishment of a professional self-insurance company implies a premise, that is, the potential loss risk of the insured enterprise, the insurance service object it provides, is small, which determines that the insurance rate of the professional self-insurance company is relatively low.

Secondly, as a risk financing tool for enterprises, professional self-insurance companies can reduce or avoid many expenses in the traditional commercial insurance market, such as commissions, premium taxes, directors' membership fees, profit surcharges and other management expenses. It is these operating expenses that constitute the additional premium in the traditional commercial insurance premium composition. According to statistics, the traditional commercial insurance companies in the United States and Europe bear 20% to 30% of the expenses, and the proportion may be higher in Asia, Africa and Latin America. Because the premiums of professional self-insurance companies are basically calculated at pure rates, without adding the above fees, it is possible to set a lower premium rate and save a lot of premium expenses for enterprises.

Thirdly, the mechanism of professional self-insurance company can reduce the moral hazard in traditional commercial insurance and reduce the insurance cost of enterprises by reducing losses. Traditional commercial insurance reduces the enthusiasm of insured enterprises to prevent and reduce losses to a certain extent, because enterprises know that their losses will be compensated by insurance companies. This situation makes the actual loss often exceed the original level, which also causes the high insurance premium rate in real life. Enterprises that establish professional self-insurance companies will continue to maintain their original enthusiasm for loss prevention, urge and strengthen risk control, and thus objectively reduce the insurance costs of enterprises.

(B) opportunity cost analysis

The enterprise insurance provided by traditional commercial insurance companies is generally one year, which requires the insured enterprises to pay the insurance premium at the beginning of the year. However, the insurance companies often lag behind in paying compensation for losses, which makes the enterprises lose the investment income of available cash flow during this period, resulting in higher opportunity cost. Faced with high-yield investment opportunities and good expectations for investment returns, professional self-insurance companies can minimize the cash outflow of the parent company's premiums, allow the parent company to pay premiums freely and flexibly, and some even allow the parent company to pay premiums after disasters. Preferential premium payment arrangements provided by professional self-insurance companies can optimize enterprise cash flow management, increase enterprise investment income and reduce the opportunity cost of insurance.

(3) Analysis of tax treatment

As mentioned above, as a special form of enterprise risk retention, the initial motivation of establishing a professional self-insurance company is to obtain tax incentives. Compared with other financing forms of enterprise risk retention, professional self-insurance companies are listed as insurance companies by tax authorities, which can not only enjoy tax concessions on settled claims and expenses, but also get tax relief on reported claims and unreported claims reserves. In addition, professional self-insurance companies can also enjoy tax incentives given by offshore registration places.

(D) Analysis of underwriting capacity

Compared with traditional commercial insurance, the underwriting services provided by professional self-insurance companies have made breakthroughs in scope and flexibility.

Judging from the scope of insurance, in traditional commercial insurance, enterprises and insurance companies often argue about which risks can be insured and which risks cannot be insured, which often hinders the normal development of insurance business and sometimes uses litigation to resolve disputes. The foothold of professional self-insurance companies is to provide sufficient insurance protection for enterprises, which can provide insurance services with wider coverage for their ever-changing and specific insurance needs. This advantage is particularly important in today's society with ever-changing risk forms.

From the perspective of underwriting flexibility, professional self-insurance companies can provide more personalized underwriting services for enterprises. On the one hand, we can not only provide insurance products with higher amount and longer term than traditional commercial insurance according to the needs of enterprises, but also tailor different insurance product combinations for enterprises, that is, "package" different types of risks faced by enterprises; On the other hand, professional self-insurance companies can determine different insurance clauses such as insurance rates, underwriting amounts and retention quotas according to the risk level and specific needs of subsidiaries of the parent company, which is highly targeted and flexible.

Further reading: How to buy insurance, which is good, and teach you how to avoid these "pits" of insurance.