The cycles and swings of the commercial insurance market have and will continue to have an impact on customers' buying decisions.
Being at the whim of the insurance market cycle is never ideal. Sophisticated buyers can manage their dependency on market cycles by utilizing both risk transfer and risk retention techniques to provide long term solutions for their most complex risks.
Fortunately, given the multiple risk-financing techniques available in the market today, companies have choices to assume more of that desired control — to protect their brand, mitigate risk, assure proper use of expenses and strike a balance within their risk appetite.
Options on the Table
Retaining risks occurs in varying degrees and many forms. No company jumps into retaining all or a portion of its risks without careful consideration. It requires quite a commitment, a strong risk tolerance and a careful evaluation of options, which in today's market includes the following:
Paying a premium to buy insurance and transfer the risk.
Taking a large, loss-sensitive deductible, or self-insured retention, in all or a portion of a risk-management program.
Making a move to become a qualifying self-insured in a certain line of coverage or a certain state. Lines of coverage typically characterized by high frequency and low severity of claims are the most enticing for self-insurance. General Liability (GL), Workers’ Compensation and Commercial Auto are often viable options.
Forming a captive to fully address domestic, and perhaps even multinational, exposures. Given that more than 40 states have captive laws now, this has become a viable option for businesses of varying sizes, not just large corporations.
A nationwide retailer may opt to become a qualified self-insured and retain its GL risk to keep tighter control on expenses and more closely manage risks to its brand. Other scenarios include a small business with a growing fleet of vehicles that assumes a high deductible on its Commercial Auto policy or a multi-national corporation that insures its liability exposure through an offshore captive insurance company.
One of the biggest driving forces in this decision is expense management. But companies need to carefully weigh the expense management control gained through retaining more risk or self-insuring against the operational expenditures required to administer them. Consider claims handling. Companies either have to be prepared to handle claims in house or contract with a qualified third-party administrator.
Additionally, when a company opts to self-insure or retain more of their exposures, they are betting on their own ability to minimize financial losses and manage their own risks. With self-insurance or large retention programs, first-dollar claims expenses are paid directly out of the company's pocket. Therefore, diverting greater attention to safety and loss-prevention programs goes hand in hand with retaining more risk.
Companies also have to consider what they require to do business. In many instances, companies are required to present a certificate of insurance. If “first dollar” coverage is important to those requiring such certificates, then qualified self-insured status might not be a viable option.
Added Layers of Protection
Although the largest of companies may have sufficient financial capital to cover virtually most losses for GL, Auto or Workers’ Comp claims, many companies purchase — either because of their own risk appetite or state requirements — an additional layer of excess insurance protection to reimburse them for claims above a specified dollar level.
If they are qualified self-insured, they buy excess should losses surpass their risk threshold. If they choose a high- deductible program, they buy excess above a specified attachment point. Specific excess insurance protects against the financial consequences of a single high-dollar loss on a per-occurrence basis. Some insurance markets also offer aggregate excess insurance against the consequences of an accumulation of multiple losses within a certain attachment point.
As with other regulatory requirements, the amounts and types of excess coverage required differ by state. Insurers also have requirements. For example, large deductible programs require collateral, such as an irrevocable letter of credit or securities to assure that an insured can meet its claims obligations before triggering its excess insurance. Assessing the amount and the price of collateral required is done on a case-by-case basis.
Perspective on Partnership
No matter where a company lands in its risk-financing decision, collaboration among broker, insurer and customer is important.
Qualified self-insureds don't totally cut themselves off from the commercial insurance market, as they benefit by partnering with brokers and insurers for their excess capacity, of course, but also for their view of the “big picture.” Brokers and insurers work with any number of clients across a broad array of industries. They see the emergence of loss trends and have the data, analytics and actuarial analysis that can help their clients shape their coverage. They can also identify other risk-management solutions when necessary.
Consider when a company's self-insured status doesn't match its risk appetite. They may only be qualified to self-insure $100,000 of general liability but want to retain more risk ($500,000). Working collaboratively with their broker and insurer, they can achieve additonal risk transfer through other risk financing means.
The good news is that there are ample risk financing options to choose from. Wise risk-management planning requires careful evaluation, often working closely with the commercial insurance markets and trusted brokers to strike the right balance within a company's risk appetite.