ALTERNATIVE RISK

TAILORED PROGRAMS TO MEET YOUR SPECIFIC NEEDS

Self-insurance is best for businesses with reasonably predictable losses such as those with low severity and high frequency or those paid over time. Self-insurance doesn’t mean no insurance. Instead companies can retain predictable losses while insuring against catastrophic losses. The advantages of a self-insurance plan are:

  • Control over claims. Your business will have direct control over claims settlement. Improved claims management also may result from increased attention to the claims handling process.
  • Increased focus on risk control. Because claims are paid directly by you and hit the bottom line more quickly, there is a greater incentive to prevent or reduce them.
  • Long-term cost savings. While there are expenses associated with this technique, there is a cost savings because your business does not pay the overhead and profit components and risk charges that are part of an insurer’s premium.
  • Cash flow benefits. Since retained losses are paid over time, you may recognize a cash flow benefit from those funds. Also, the funds that would have been paid in premiums can be used for other things.

Large deductible plans generally are used for policies with deductibles of $100,000 or more.

The advantages of large deductibles are:

  • Reduced cost of risk. A large deductible program reduces the cost of risk by reducing costs paid for overhead and profit. It also lowers premium taxes and the residual market load.
  • Cash flow benefit. The insured reimburses under the deductible as they are paid. This enables your business to recognize a cash flow benefit on those funds until they are paid out.

Retros were developed so businesses would share the risk and be more focused on risk control. Retros are generally used to finance low-to-medium severity losses that have a relatively high frequency, such as workers compensation, general liability and auto liability.

The advantages of using a retro plan include:

  1. Lower costs. Costs over the long term tend to be lower because some expenses are saved, particularly the insurer’s risk charge to cover the possibility that losses will be higher than expected.
  2. Improved risk control. Because of the direct link between premium and losses, retros encourage risk control.
  3. Reduced uncertainty. The degree to which this is possible will depend on the level at which terms of the plan, such as loss limit and maximum premium, are set.
  4. Enhanced stability. If the retro includes multiple coverages, thereby diversifying risk, stability can be improved.

When businesses are willing to retain a significant portion of their losses to gain greater flexibility, they may decide to form a subsidiary to insure the loss exposure of the parent company. Some advantages of captive insurance are:

  • Lower cost of risk. Cost of risk may be lower because it involves retention, reduces expenses, avoids payment of overhead and profit components of insurer premiums, and allows for investment income. In a group captive, it also spreads administrative costs.
  • Cash flow benefit. Because claims are paid out over time, the organization earns interest income on premium funds not yet paid, producing a cash flow benefit. In addition, the underwriting profits and gains retained by the captive may offer a cash flow advantage.
  • Broader coverage. Coverages that are difficult or impossible to place, such as environmental liability, can be written through the captive.
  • Stability. A captive can offer stability in pricing and availability.
  • Direct access to reinsurance. A captive insurer allows the organization to have direct access to reinsurers that may have more flexibility in terms of underwriting and rating.
  • Greater risk retention capacity. Because it can pool its losses for all operating units, it may be able to retain more losses than the individual units.
  • Encourages risk control. A captive provides incentives for good safety and risk control practices.
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