WorldWide Drilling Resource

Drilling Into Money Not Boring by Mark E. Battersby Self-Insurance: 101 As the economy slowly improves, insurers have begun raising business insurance premiums while reducing available insurance coverage. One increasingly popular option is a “self-insurance” program or insuring the operation’s own risks. If self-insurance is right for your business, the potential benefits can include: d Lower insurance premiums d Better insurance coverage d More reliable insurance d A safer workplace d An improved bottom line By self-insuring, a drilling business, distributor, manufacturer, or supplier becomes its own insurer for either a certain level of risk or certain types of risk. Obviously, some risks cannot be self-insured without being approved by state regulators. Workers' compensation can, for example, be self-insured, but must meet certain guidelines and usually requires approval. Mandatory auto liability insurance can be self-insured only by meeting state requirements. For many drilling operations however, self-insurance makes great sense. After all, why pay an insurer when you can pay yourself? Plus, in most instances the busi- ness is not insuring the entire risk. Instead, it is self-insuring only a portion of the risk. Self-Insurance can also help a drilling operation obtain insurance coverage which would not otherwise be available. Since a self-insurer pays its own claims, policies can be tailored to an operation’s specific needs with less impact from the inevitable changes in the traditional insurance market. A “captive” is an insurance company which insures the risks of its owner, affil- iated businesses, or a group of busi- nesses. Although captives were initially used only by large multinationals, the concept has caught on, and today captives are found in a wide variety of businesses. U.S. tax laws recognize insurance companies receiving premium dollars up- front, may not pay out claims (associated with those premiums) for many years. Therefore, the tax laws allow insurance companies more generous current deduc- tions. While some tax advantages result with a properly planned captive, achieving such advantages should not be a key goal for any drilling contractor. Self-insurance is by no means appropriate for every business and a feasibility study and/or profes- sional assistance should play a significant role in determining the suitability of self- insurance. Self-insurance can lead to significant savings for some drilling businesses. While recent Internal Revenue Service rulings have made captive insurance arrangements somewhat more complex, some states now allow individual businesses and groups to band together to obtain difficult to purchase types coverage. Overall, however, the associated benefits of self-insurance and captive insurance companies continue to outweigh their negative aspects. Mark Mark E. Battersby may be contacted via e-mail to michele@ worldwidedrillingresource.com +- )+-" &*#+-) /&+* ' *!/& ' *!/& +) 222 ' *!/& +) / -/ 4+0- 0.&*".. 2&/% +0/% +-" 6. (" !&*$ ) *0# /0-"- "3,+-/"- -+1"* ./ (&.%"! .&* " .&* " +1") "- 0- ,-+!0 / (&*" 5 % ))"-. &/. 5 (0./"- !-&(( % ))"-. &/. 5 1"- 0-!"* !-&((&*$ .4./"). 5 &*$ &/. 0$"- &/. 5 -"2 -+!. -+!. 5 ))"- -" '+0/ /+*$. 5 + ' /++(. "/ (" +* ))"-. &/. ## 29 WorldWide Drilling Resource ® SEPTEMBER 2016 Visit us online! worldwidedrillingresource.com