Cover reimagined: Where self-insurance meets traditional protection 

Richard Hood, CEO of OLEA South Africa 

For many established businesses, conventional insurance can feel like a necessary evil, a grudge purchase that delivers diminishing value over time. Yet, the transition from traditional coverage to self-insurance is not a leap of faith but a calculated step in risk maturity.  In the past, self-insurance was traditionally reserved for major corporate organisations. The new trend is that smaller businesses, unable or unwilling to pay millions to insurers, are choosing a blended program of traditional and self- insurance.  

Self-insurance is nothing new. It’s been in existence for many years with companies adopting a blended program. The trend emerging is that smaller businesses are adopting an insurance strategy that was traditionally reserved for larger corporates. These are rather founders of business, entrepreneurs who have built credible businesses over the past decade. They employ between 100 and 1 000 people and are privately owned with leadership that challenges the norm.  

Suddenly, they’re paying R3 million annually on insurance but have claimed only R500 000 a year. If a business looks at basic economics, they will start questioning this logic. Asking: ‘Surely I can take on some risk myself?’  It is interesting to note that it’s often the generational businesses, that have been handed down to the children, who are making the transition. They’re introducing new ways of thinking, be it introducing AI, new processes and products or alternative ways of insuring the business. It’s a whole new perspective on how the business could run most effectively.  

So, when does it make sense to switch? 

In the early stages of a company’s lifecycle, traditional insurance is essential. It’s often mandated by lenders and acts as a financial safety net for businesses unable to absorb significant losses. However, once the company reaches a level of maturity – marked by effective risk management, financial stability and a reliable loss history – self-insurance becomes an attractive alternative. As brokers, we work with the company by examining their loss trends and claims’ history, analysing their needs, introduce risk stats and actuarial reports and recommend where we believe self-insurance is the better option.  

It must be stressed that not all risks are suitable for self-insurance. Catastrophic events like fires are an example of when it would be unwise to move from traditional insurance.  We believe we are disruptors in this traditional market by introducing innovative changes, because traditionally brokers won’t go in with that mindset. 

The turning point – from risk transfer to risk ownership – As businesses grow and their risk landscapes become more predictable, many begin to question the long-term value of conventional insurance. Statements like, ‘We could have self-insured for years instead of enriching insurers,’ are not uncommon. 

Why businesses grow frustrated – Despite investing heavily in preventative measures, like enhanced security or fire suppression systems, many companies see little to no corresponding reduction in their insurance premiums. Traditional insurers often do not offer sufficient incentives for businesses that proactively mitigate risk. It is also common practice to escalate premiums over time, which brings frustration and uncertainty to longer term expense containment. 

It is this disconnect that prompts companies to explore self-insurance solutions that offer more control, increased value and positive returns. It means more favourable results that investors anticipate when investing in a particular venture.  

We are using our expertise to help business structure these alternative programs. We’re not driven by selling an insurance policy but rather by finding risk solutions for our clients, often blending self and traditional insurance.  

Key indicators that it’s time to transition 

Transitioning to self-insurance isn’t for everyone. A few critical factors must be in place: 

• Predictable loss history: At least five years of consistent and predictable loss data helps inform sound decisions 

• Financial strength: A robust balance sheet is necessary to absorb the potential impact of self-insured losses 

• Expert guidance: Access to experienced risk finance advisors is vital to structure and optimise the self-insurance framework 

The evolution: Blending self-insurance with traditional cover 

Rather than a straight switch, most businesses adopt a blended approach. This involves: 

• Retaining conventional insurance for catastrophic events: Natural disasters and major fires  

• Self-insuring high-frequency, low-severity risks: Everyday incidents that result in predictable claims can often be more efficiently managed internally 

• Addressing previously uninsured risks: Some exposures, such as credit risks or product warranties, are either too costly or not covered by the market. Self-insurance offers a viable solution here 

• Adjusting excess levels: Increasing deductibles can yield significant savings while effectively shifting part of the risk to the business itself 

Contingency policies: The bridge to self-insurance – One of the most practical tools for transitioning to self-insurance is a Contingency Policy, often referred to as a ‘rent-a-captive.’ This is a standard insurance policy, designed to underwrite self-insured risks, while allowing the business to share in underwriting profits if claims are low.  

Contingency policies usually work in conjunction with traditional insurance programs and ensure no gaps in coverage. Over time, they allow businesses to build internal risk reserves, making them less reliant on external insurers and more capable of negotiating favourable rates. Basically, it creates a mechanism for you to ring fence funds that you can dedicate for use for self-insured losses. 

Why contingency policies work 

• Strategic risk management tool: They enable better control over risk exposure, loss trends and funding 

• Flexible design: Easily tailored to suit different structures, premium levels and reinsurance strategies 

• Cost-effective: Unlike captives, they require no upfront capital and offer low operating costs 

• Off-balance sheet profits: Underwriting profits are retained without impacting company financials 

• Investment growth: Positive balances can generate interest income 

• Premium efficiency: Premiums are deductible business expenses, adding further financial efficiency 

The decision to move from conventional insurance to self-insurance is a sign of business maturity, one that recognises risk as an asset to be managed, not merely transferred.  With the right structures and advisory support in place, self-insurance empowers companies to take greater control of their financial destiny, reduce dependency on insurers and even turn risk management into a source of profit.