The concept of pooling is not a new one. It began with Lloyds of London over 300 years ago when a group of merchants agreed to share losses with each other in their shipping interests.Self-funding or pooling to use another term, is where entities with similar exposures agree to pool their money into a central fund to pay losses incurred.
In pure self-insurance, the only protection against losses is the funds within the pool itself. There is no point at which the exposure to loss is capped.
Self funding differs from self insurance as used in Risk Management Terminology in that when an exposure is self funded, there is a point where the participants’ amount of loss (self insured retention) is limited by the purchase of insurance. This insurance is of two categories:
- Specific Stop Loss — limits any single claim of loss to a specific amount;
- Aggregate Stop Loss — limits the total amount of loss the fund will experience due to any number of specified claims within the self insured retention. Therefore, the amount of actual loss the fund will experience can be predetermined.
The reason a group of entities, either public or private, would assume any risk at all is that through intensive loss control efforts and cost containment measures imposed, the group should be able to reduce their losses to a greater extent than if they were individually placed into the heterogeneous pool of an insurance company.
A pool can benefit from more efficient claims handling, retain interest income from deposits reserved to pay claims, it removes the profit motivation from traditional insurance and give control back to the employer/member.