Can you set up a legally qualified self insurance?
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
2yQuote from @Kyle S.:
Quote from @Bill B.:
But you would have to have the cash set aside in escrow to pay off the entire property if there was a disaster. Kind of defeats the purpose.
If you have a $500k property they won’t just accept $100/mo is going toward “insurance”. You’re going to need an account with $500k sitting in it to pay them off if the house is destroyed. You’re better off just putting the $500k in a cd and getting paid $2k/mo in interest and spending $100 of that on insurance.
Imagine you put the $100/mo aside telling the bank it’s “insurance”. 2 years later the house burns down and the account has $2,400 in it. The bank says your “insurance company” needs to pay off the $450k mortgage balance, where’s that money coming from?
With enough properties it could make sense. If there are 100 100k houses and I am legally allowed to underwrite 10m in coverage with a reserve of 300k, and I am saving 60k a year in premiums, that could make sense, especially if I am allowed to make a return on the 300k (holding bonds or something). Realistically, I am never going to have over 3 total losses in discontiguous houses at the same time, so hopefully something like this is a legal possibility.
My actual scale is a little larger than that but not way beyond that. So I am optimistic hoping I have the scale to do something like this, but its realistic enough to be worth looking into it.
As mentioned, your lenders will want you to have $10M in money put aside. You can underwrite it but who is going to back the policy? While you may think three claims could never occur, what happens if a bullet passes through the a home and kills someone and the tenant decides to sue. The legal on that alone will be huge (more than the house is worth probably).
What some people do is they will self insure up to a value. For example the first $50,000 in damages/claims they will insure and then get a policy to cover anything above that.
This will provide lower premiums and save money and also cover you for a catastrophic event.
7e investments53 Reviews
24 Replies
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Kyle S.:
I am wondering if it is possible to set up a legal self insurance company for rental property insurance? I am not talking about just dropping coverage and taking the risk, and I am not talking about dropping insurance and putting monthly payments into a savings account. I am talking about a legal insurance company that would write a policy that a lender would accept. I have scale to an extent, maybe not enough for this, and I also have other landlords that may join me in something like this.
Are you saying you want to set up your own insurance brokerage?
7e investments53 Reviews - Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes2y
But you would have to have the cash set aside in escrow to pay off the entire property if there was a disaster. Kind of defeats the purpose.
If you have a $500k property they won’t just accept $100/mo is going toward “insurance”. You’re going to need an account with $500k sitting in it to pay them off if the house is destroyed. You’re better off just putting the $500k in a cd and getting paid $2k/mo in interest and spending $100 of that on insurance.
Imagine you put the $100/mo aside telling the bank it’s “insurance”. 2 years later the house burns down and the account has $2,400 in it. The bank says your “insurance company” needs to pay off the $450k mortgage balance, where’s that money coming from?
- 2yKyle S.Member since 2024 · 10 posts · 2 votesOP
Quote from @Bill B.:
But you would have to have the cash set aside in escrow to pay off the entire property if there was a disaster. Kind of defeats the purpose.
If you have a $500k property they won’t just accept $100/mo is going toward “insurance”. You’re going to need an account with $500k sitting in it to pay them off if the house is destroyed. You’re better off just putting the $500k in a cd and getting paid $2k/mo in interest and spending $100 of that on insurance.
Imagine you put the $100/mo aside telling the bank it’s “insurance”. 2 years later the house burns down and the account has $2,400 in it. The bank says your “insurance company” needs to pay off the $450k mortgage balance, where’s that money coming from?
With enough properties it could make sense. If there are 100 100k houses and I am legally allowed to underwrite 10m in coverage with a reserve of 300k, and I am saving 60k a year in premiums, that could make sense, especially if I am allowed to make a return on the 300k (holding bonds or something). Realistically, I am never going to have over 3 total losses in discontiguous houses at the same time, so hopefully something like this is a legal possibility.
My actual scale is a little larger than that but not way beyond that. So I am optimistic hoping I have the scale to do something like this, but its realistic enough to be worth looking into it.
- 2yKyle S.Member since 2024 · 10 posts · 2 votesOP
Quote from @Chris Seveney:
Quote from @Kyle S.:
I am wondering if it is possible to set up a legal self insurance company for rental property insurance? I am not talking about just dropping coverage and taking the risk, and I am not talking about dropping insurance and putting monthly payments into a savings account. I am talking about a legal insurance company that would write a policy that a lender would accept. I have scale to an extent, maybe not enough for this, and I also have other landlords that may join me in something like this.
Are you saying you want to set up your own insurance brokerage?
I responded but I am new to this site so I guess it was just a response to my own OP. I seek to be the insurance provider, not the broker.
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes2y
As you pay them off you could certainly “self insure”. But could you lose it all if something like a natural gas explosion killed a family of 5? Might they not want $20 million?
I'm certainly not saying that's likely. But how about some stupid event we can't think of that causes you to be sued for millions. I don't know if you could get an umbrella policy that would cover self insured homes. If so that would make me feel better about the idea. And please don't let someone convince you 10-50-100 LLC's would protect you. In these cases you're going to be sued personally as well as the LLC's as you will have been involved personally in events leading up to the loss.
Ps. Maybe you can find someone with very large deductibles? $10k+ for cheap? Upside is this would work even on properties with mortgages.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Kyle S.:
Quote from @Bill B.:
But you would have to have the cash set aside in escrow to pay off the entire property if there was a disaster. Kind of defeats the purpose.
If you have a $500k property they won’t just accept $100/mo is going toward “insurance”. You’re going to need an account with $500k sitting in it to pay them off if the house is destroyed. You’re better off just putting the $500k in a cd and getting paid $2k/mo in interest and spending $100 of that on insurance.
Imagine you put the $100/mo aside telling the bank it’s “insurance”. 2 years later the house burns down and the account has $2,400 in it. The bank says your “insurance company” needs to pay off the $450k mortgage balance, where’s that money coming from?
With enough properties it could make sense. If there are 100 100k houses and I am legally allowed to underwrite 10m in coverage with a reserve of 300k, and I am saving 60k a year in premiums, that could make sense, especially if I am allowed to make a return on the 300k (holding bonds or something). Realistically, I am never going to have over 3 total losses in discontiguous houses at the same time, so hopefully something like this is a legal possibility.
My actual scale is a little larger than that but not way beyond that. So I am optimistic hoping I have the scale to do something like this, but its realistic enough to be worth looking into it.
As mentioned, your lenders will want you to have $10M in money put aside. You can underwrite it but who is going to back the policy? While you may think three claims could never occur, what happens if a bullet passes through the a home and kills someone and the tenant decides to sue. The legal on that alone will be huge (more than the house is worth probably).
What some people do is they will self insure up to a value. For example the first $50,000 in damages/claims they will insure and then get a policy to cover anything above that.
This will provide lower premiums and save money and also cover you for a catastrophic event.
7e investments53 Reviews - 2yKyle S.Member since 2024 · 10 posts · 2 votesOP
Quote from @Bill B.:
As you pay them off you could certainly “self insure”. But could you lose it all if something like a natural gas explosion killed a family of 5? Might they not want $20 million?
I'm certainly not saying that's likely. But how about some stupid event we can't think of that causes you to be sued for millions. I don't know if you could get an umbrella policy that would cover self insured homes. If so that would make me feel better about the idea. And please don't let someone convince you 10-50-100 LLC's would protect you. In these cases you're going to be sued personally as well as the LLC's as you will have been involved personally in events leading up to the loss.
Ps. Maybe you can find someone with very large deductibles? $10k+ for cheap?
Insurance wouldn't cover that natural gas thing anyway. I guess my 300k figure is low because I would need liability coverage, but that is generally about a 500k limit for little properties. So self insured or not, and corporate veil piercing or not, only 500k is coming from insurance. Alternatively, I could maybe outsource just the liability component and still save a ton on premiums.
10k deductibles are not usually an option. Whatever the type of financing might be, they usually have maximums not allowing deductibles that high. And it only saves 10-20% anyway.
- 2yKyle S.Member since 2024 · 10 posts · 2 votesOP
Quote from @Chris Seveney:
Quote from @Kyle S.:
Quote from @Bill B.:
But you would have to have the cash set aside in escrow to pay off the entire property if there was a disaster. Kind of defeats the purpose.
If you have a $500k property they won’t just accept $100/mo is going toward “insurance”. You’re going to need an account with $500k sitting in it to pay them off if the house is destroyed. You’re better off just putting the $500k in a cd and getting paid $2k/mo in interest and spending $100 of that on insurance.
Imagine you put the $100/mo aside telling the bank it’s “insurance”. 2 years later the house burns down and the account has $2,400 in it. The bank says your “insurance company” needs to pay off the $450k mortgage balance, where’s that money coming from?
With enough properties it could make sense. If there are 100 100k houses and I am legally allowed to underwrite 10m in coverage with a reserve of 300k, and I am saving 60k a year in premiums, that could make sense, especially if I am allowed to make a return on the 300k (holding bonds or something). Realistically, I am never going to have over 3 total losses in discontiguous houses at the same time, so hopefully something like this is a legal possibility.
My actual scale is a little larger than that but not way beyond that. So I am optimistic hoping I have the scale to do something like this, but its realistic enough to be worth looking into it.
As mentioned, your lenders will want you to have $10M in money put aside. You can underwrite it but who is going to back the policy? While you may think three claims could never occur, what happens if a bullet passes through the a home and kills someone and the tenant decides to sue. The legal on that alone will be huge (more than the house is worth probably).
What some people do is they will self insure up to a value. For example the first $50,000 in damages/claims they will insure and then get a policy to cover anything above that.
This will provide lower premiums and save money and also cover you for a catastrophic event.
Insurance companies are not required to hold reserves dollar for dollar. The reserves allocated to a 10m policy are way less than 10m, I just don't know exactly how much. So the main question is how much less. If it is really low, like 3-5 percent, then at least as far as that point goes it would be worth doing it myself.
- 2yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Kyle S.:
Quote from @Chris Seveney:
Quote from @Kyle S.:
Quote from @Bill B.:
But you would have to have the cash set aside in escrow to pay off the entire property if there was a disaster. Kind of defeats the purpose.
If you have a $500k property they won’t just accept $100/mo is going toward “insurance”. You’re going to need an account with $500k sitting in it to pay them off if the house is destroyed. You’re better off just putting the $500k in a cd and getting paid $2k/mo in interest and spending $100 of that on insurance.
Imagine you put the $100/mo aside telling the bank it’s “insurance”. 2 years later the house burns down and the account has $2,400 in it. The bank says your “insurance company” needs to pay off the $450k mortgage balance, where’s that money coming from?
With enough properties it could make sense. If there are 100 100k houses and I am legally allowed to underwrite 10m in coverage with a reserve of 300k, and I am saving 60k a year in premiums, that could make sense, especially if I am allowed to make a return on the 300k (holding bonds or something). Realistically, I am never going to have over 3 total losses in discontiguous houses at the same time, so hopefully something like this is a legal possibility.
My actual scale is a little larger than that but not way beyond that. So I am optimistic hoping I have the scale to do something like this, but its realistic enough to be worth looking into it.
As mentioned, your lenders will want you to have $10M in money put aside. You can underwrite it but who is going to back the policy? While you may think three claims could never occur, what happens if a bullet passes through the a home and kills someone and the tenant decides to sue. The legal on that alone will be huge (more than the house is worth probably).
What some people do is they will self insure up to a value. For example the first $50,000 in damages/claims they will insure and then get a policy to cover anything above that.
This will provide lower premiums and save money and also cover you for a catastrophic event.
Insurance companies are not required to hold reserves dollar for dollar. The reserves allocated to a 10m policy are way less than 10m, I just don't know exactly how much. So the main question is how much less. If it is really low, like 3-5 percent, then at least as far as that point goes it would be worth doing it myself.
This like being levered on insurance. If it's "within" the rules, sure, you can create your own brokerage put the minimum reserves for the property value of the houses you're buying. In the event of a true disaster, just know you can't keep yourself whole.
Basically, you're participating to save on pennies--via a normal insurance process--and to keep yourself exposed to any fat tails event.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
@Kyle Stewart
If you have loans on these you are going to spend tens of thousands in legal just to get an agreement together that the bank would approve.
Even the largest owners of real estate in the country don’t do this, and they try and squeeze every penny
7e investments53 Reviews - 2yKyle S.Member since 2024 · 10 posts · 2 votesOP
Quote from @Chris Seveney:
@Kyle Stewart
If you have loans on these you are going to spend tens of thousands in legal just to get an agreement together that the bank would approve.
Even the largest owners of real estate in the country don’t do this, and they try and squeeze every penny
That would be instructive if the largest real estate owners in the country don't do this. Do you know that for certain? Do you know where I could verify that?
- Real Estate Investor · Saint Paul, MN · Member since 2017 · 543 posts · 474 votes2y
@Kyle Stewart If you’re going to set up an actual insurance company, you need to deal with corporate formation, policy drafting, regulatory approval, reserve requirements, etc. In other words, millions of dollars in the hope that you can get your policies approved in the states you want them issued. 
But I think you’re really talking about self insuring. I don’t think there’s a lender in the country that will let you borrow under the premise of self insuring the property. If you don’t have any debt on your properties and you feel comfortable taking the risk of self insuring, you are still ignoring the greater risk from liability claims. Property insurance is only part of the risk management equation.
- 2yKyle S.Member since 2024 · 10 posts · 2 votesOP
Quote from @Mark S.:
@Kyle Stewart If you’re going to set up an actual insurance company, you need to deal with corporate formation, policy drafting, regulatory approval, reserve requirements, etc. In other words, millions of dollars in the hope that you can get your policies approved in the states you want them issued. 
But I think you’re really talking about self insuring. I don’t think there’s a lender in the country that will let you borrow under the premise of self insuring the property. If you don’t have any debt on your properties and you feel comfortable taking the risk of self insuring, you are still ignoring the greater risk from liability claims. Property insurance is only part of the risk management equation.
I am not looking to informally self insure, I am looking to make a compliant insurance company. I am doubtful it would be into the millions. My guess is, with a maximally frugal approach, mid 5 to low 6 figures to create, and high 4 to low 5 figures annually to maintain. If at the low end of that, it could be worth it.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes2y
Insurance company reserve requirements are typically in the 10-15% of policy value.
You would also have ongoing regulatory costs. Licensing, regulatory, office space, and such costs.
District Invest Group546 Reviews - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Kyle S.:
Quote from @Chris Seveney:
@Kyle Stewart
If you have loans on these you are going to spend tens of thousands in legal just to get an agreement together that the bank would approve.
Even the largest owners of real estate in the country don’t do this, and they try and squeeze every penny
That would be instructive if the largest real estate owners in the country don't do this. Do you know that for certain? Do you know where I could verify that?
Well I worked for two $1B+ companies and this was never even considered due to the legalities and risk. As others mentioned, the regulatory requirements, licensing and etc. do not make it worthwhile.
7e investments53 Reviews - Investor · Cranston, RI · Member since 2023 · 34 posts · 31 votes2y
You may want to look into forming a captive insurance company, which acts as a supplement to traditional insurance. Large real estate companies do this. Worth some research.
https://www.nisivoccia.com/captive-insurance-strategies-can-pay-off-for-real-estate-operators/#:~:text=The%20captive%20insurer%20can%20cover,or%20subject%20to%20high%20deductibles.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes2y
I was considering self-insuring a debt-free rental house beginning in May. My insurance policy is not being renewed. Old house I guess. Never had a claim.
I can't do it. 21 years having 3 dozen and only 1 $5700 roof claim, but it would just be my luck. I'll get a new policy or sell. The 'worry' of something happening would rattle my chi. I like my chi and will willingly pay $100 (deductible) a month for it.
- 2yKyle S.Member since 2024 · 10 posts · 2 votesOP
Quote from @Russell Brazil:
Insurance company reserve requirements are typically in the 10-15% of policy value.
You would also have ongoing regulatory costs. Licensing, regulatory, office space, and such costs.
Thank you for that information. 10-15% would kill the idea. I guess I was too optimistic on what to expect for reserve requirements.
- 2yKyle S.Member since 2024 · 10 posts · 2 votesOP
Quote from @Emily Holbrook:
You may want to look into forming a captive insurance company, which acts as a supplement to traditional insurance. Large real estate companies do this. Worth some research.
https://www.nisivoccia.com/captive-insurance-strategies-can-pay-off-for-real-estate-operators/#:~:text=The%20captive%20insurer%20can%20cover,or%20subject%20to%20high%20deductibles.
Thank you for that idea, I will research that. This may be the solution I go with.
- Insurance Agent · Norwalk, CT · Member since 2016 · 2k+ posts · 1k+ votes2y
Kyle,
I recently met a company that is setting up Insurance captives and is targeting smaller entities than may have been serviced in the past. PM me your email and I will connect you.
- 2yOwen RosenBusiness MemberProfessional · Clinton Township, MI · Member since 2015 · 676 posts · 259 votes
Quote from @Kyle S.:
Quote from @Mark S.:
@Kyle Stewart If you’re going to set up an actual insurance company, you need to deal with corporate formation, policy drafting, regulatory approval, reserve requirements, etc. In other words, millions of dollars in the hope that you can get your policies approved in the states you want them issued. 
But I think you’re really talking about self insuring. I don’t think there’s a lender in the country that will let you borrow under the premise of self insuring the property. If you don’t have any debt on your properties and you feel comfortable taking the risk of self insuring, you are still ignoring the greater risk from liability claims. Property insurance is only part of the risk management equation.
I am not looking to informally self insure, I am looking to make a compliant insurance company. I am doubtful it would be into the millions. My guess is, with a maximally frugal approach, mid 5 to low 6 figures to create, and high 4 to low 5 figures annually to maintain. If at the low end of that, it could be worth it.
8 figures minimum plus everything else that's been mentioned in terms of effort and time.
Royal Oath Insurance Group4.9204 Reviews - 2yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
Need to get your license. Then register by state. Need to find a Reinsurer to spread the risk. Software. Sales team. Office group. Then auditors. Office. Reserves.
Start addressing each item and that will let you know if you can set up an insurance company.
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