As a company grows, so too may its frustration with traditional guaranteed cost placements. While traditional insurance structures may have advantages, they consistently suffer from several drawbacks that make them undesirable for small, medium, and even large companies, including considerable cost, limited access, and an inability to control plans and costs from the employer’s end.
When examining topics like guaranteed cost insurance vs. deductible plans, it is important to know the alternatives and why an employer may find their implementation beneficial. Here we will examine the benefits and potential drawbacks of two such alternatives: Large Deductible Plans and Captive Insurance Plans.
Large Deductible Plan
Large Deductible Plans are most commonly associated with workers’ compensation, though they can be implemented in general, automobile, and professional liability. A “large” deductible is generally defined as $100,000 or more and can be structured with the carrier handling the claims or in conjunction with a third party administrator. Any insured considering a large deductible plan should consider how much risk they can afford to take per occurrence as well as per policy year. Programs can be structured to protect the insured with an aggregate deductible.
Numerous benefits exist for employers who opt for large deductible plans. These can include reductions in premiums, increased control over claim handling and control over the level of risk to take. Furthermore, by putting substantial risk on the employer, it provides a greater incentive to provide a safe work environment, as they assume a higher risk if their employers are not properly cared for. The downsides of such plans include increased financial risk to the employer, the need for collateral and increased administration time to manage claims within the deductible.
Traditionally, a Captive is an entity created by a company or group of companies to provide insurance to its own (non-insurance) related companies. This is done in order to meet the risk management needs of its owners or members. To ensure those needs are met, much of the routine operations of the Captive are controlled by the owners, who are also the principal insureds. Today, 10% of the commercial insurance premium or $75 billion is in Captives; there are also currently 68 Domiciles throughout the world and roughly 7,000 Captives.
Captives have numerous advantages beyond the personalization of coverage. Companies that choose to form Captives may find a reduction in and/or stabilization of costs, as their costs are no longer dictated by the ebbs and flows of retail insurance market pricing. Companies can also capitalize on an above-average claims experience because they are no longer subject to commercial carriers’ rate making policies. By creating a Captive, companies frequently have access to the reinsurance market, which, under certain circumstances, means offering increased coverage when compared to what is available in the retail market.
Multiple types of Captive options are available for companies looking to form Captives, all with their own advantages and challenges. Here are some of the pros and hurdles to overcome.
Single Parent Captives:
- Legally distinct bodies insuring the risks of parent and affiliated companies
Advantage: maintain control over underwriting terms, policy phrasing, investments, and insurance decisions.
Challenge: Initial set-up and maintenance costs
- capital and surplus of the captive facility is “rented” to the policyholder
Advantage: less startup cost
Challenge: less control over coverage and price
Protected Cell/Segregated Cell Captive:
- every account or cell within the Captive is legally distinct
- insured and owner are also legally distinct
Advantage: less capital required to enter
Challenge: capital provider controls underwriting guidelines and investment decisions
Several other forms of Captive are available to companies interested in Captives, each with their own benefits and drawbacks. These include Agency Captives, Excess Layer Captives, Trade Group or Association Captives, and more.
Traditional commercial insurance products often don’t adequately and cost-effectively protect a business from known risks – and they certainly don’t help uncover and insure unknown risks. Brokers who can have this conversation with owners and guide them to alternative risk solutions will build value with their business owner clients and differentiate themselves from other insurance brokers. That is why we built the Conway E&S alternative risk team – to be your partner who can help you have these conversations with your clients and prospects, help design better comprehensive insurance solutions, and in the end place more lines of coverage in both traditional and alternative risk. Contact us today for more information.