Auto insurance in Alabama from alabamacarinsurancequotes.net rates, once adopted, take time and effort to discontinue. This really is so since there is a potential for any “double cash outflow” when the plan’s discontinued, since the self-insurer could be paying both current year’s insurance premium and the loss runoff from the previous self-insurance years. Find auto insurance in Alabama at www.alabamacarinsurancequotes.net.
Reserves. The size of the reserve fund is essentially a function of the number and size of expected claims. The point is, reserve funds must be isolated from the other working capital of the firm and invested in savings certificates, treasury bills or any other liquid money equivalents. Bank credit ought to be available in coming of need, and the self-insurer should know where other back-up financing can be obtained. Interest income is expected to be earned on the funds set aside to pay claims. Here the time value of money can be substantial since claims against a fund are not all paid at the same time.
Retention Levels. The criterion accustomed to appraise the potential impact of a self-insurance loss happens to be based on some general guidelines. These rules include: 0.17 of annual revenues; 17 of working capital; 17 of shareholders equity, and 57 of pr e t ax earn ing s.
Non-profit institutions, for example hospitals, often fix the limit of retained losses in a percentage of their annual budget, since the figure accurately pertains to their yearly financial operation.
Another way of determining risk retention levels would be to choose the insurance program which minimizes the risk-adjusted cost. This involves quantifying a company’s conservatism inside a so-called “risk aversion level,” which is based on an established theory referred to as Risk Preference (Utility) Theory.
A company’s risk aversion level relates to its self-insurance capacity (SIC), that is, the quantity of unexpected aggregate loss it may absorb in one year, total exposures. A company’s risk aversion level is determined according to the formula: r = 1/SIC. For example, where a firm’s self-insurance capacity is expressed in billion dollar units, a $100,000 SIC equals $0.1 million, so r = 1/10 = 10 millionths.
When a risk manager has quantitatively determined a firm’s willingness to bear risk, it is then easy to assess the Risk Adjusted Cost of risk retention. Risk Adjusted Price is understood to be a dollar quantity which measures just how much a company could be willing to pay to get rid of its risk exposure. This is more than the Expected Loss but less than the Maximum Possible Loss, and includes unexpected losses to become paid, plus budgeted items like the expenses of loss settlement. For the reason that sense, it’s roughly similar to reasonably limited.