Could Alternative Risk Financing Reduce Your Company’s Insurance Costs?

Effective risk management isn’t just about protecting your business. It’s also about controlling costs. Insurance is one way to transfer risk, but sky-high premiums can become another drain on a company’s bottom line, threatening profits and limiting growth. Alternative risk financing strategies give businesses a way to control risks while potentially reducing long-term insurance costs.

What Is Alternative Risk Financing?

In traditional insurance, the insured pays premiums to an insurance carrier, and the carrier provides coverage for eligible claims, sometimes with a deductible. In alternative risk financing, businesses take a different approach to risk management. Exactly how this works depends on the specific strategy used.

Here are some compelling alternative risk financing strategies to consider:

• Single-Parent Captives. Your company establishes and owns a captive insurance company that exists for the sole purpose of insuring your company, known as the parent company. Setting up a single-parent captive requires initial capital, and the captive structure is subject to regulations. However, this approach gives companies greater control over their coverage, as well as the potential for cost savings and tax advantages. This option is particularly popular with large corporations. According to NAIC, around 90% of Fortune 500 companies have captive subsidiaries.
• Group Captives. Your company joins a group captive that provides coverage for your company as well as the other companies that are members of the captive. This approach to captive insurance gives smaller companies a practical way to share the benefits of captive insurance. Multiple companies can pool resources to spread risk, making costs more manageable and increasing their negotiating power with the various service providers they’ll need.
• Self-Insured Retentions. Your company buys an insurance policy with a self-insured retention set at a predetermined dollar threshold. If a claim occurs, your company is responsible for all costs, including legal defense, until the threshold is met. Once the threshold is reached, insurance coverage applies. By accepting a self-insured retention, your company can secure lower premiums. You also control how the claim is handled initially, which could be considered an advantage or a disadvantage, depending on your perspective.
• Large Deductible Programs. Your company buys an insurance policy with a large deductible. If a claim occurs, your company is responsible for this deductible. A large deductible program is similar to a self-insured retention, except that with a large deductible program, the insurer pays the full cost first and then bills you for the deductible. By accepting a large deductible, you can negotiate lower premiums, which can result in immediate cost savings.
• Loss-Sensitive Programs. Your company pays a lower upfront cost for coverage, but if you experience losses, your costs can increase. Loss-sensitive programs can take different forms, including retrospective rating programs that adjust premiums based on the actual loss experience. You benefit from lower upfront premium costs, and if you can keep your claims down, you can save money.

Which Coverage Lines Are Good Candidates for Alternative Risk Financing?

Alternative risk financing solutions are suitable for many different lines of coverage.

Group captive programs typically cover liability, commercial auto, umbrella and workers’ compensation insurance. It may be possible to carve out workers’ compensation, if desired, depending on the premiums involved. Other ancillary liability lines, such as employment practices liability and professional liability, are typically kept separate.

The Pros and Cons of Alternative Risk Financing

Alternative risk financing options are attractive because of the potential for cost savings. If your company is successful in managing its risks, it’s possible to achieve significant savings compared to a traditional insurance program. With a self-insured retention, large deductible program or loss-sensitive program, the savings come in the form of lower premiums. In a captive program, if you succeed in keeping claims low, you can receive dividends.

Alternative risk financing also provides greater flexibility and control. This is especially important when traditional insurance carriers are unwilling to underwrite key risks. By using an alternative risk financing option, you can still obtain the coverage you need to manage your risks.

However, there are also disadvantages.

Captive programs require upfront capital. It is possible to limit liability with reinsurance or stop-loss coverage, but if you have higher losses than expected, you may still have higher costs until your catastrophic coverage kicks in.

With other forms of alternative risk financing, if you experience higher losses than expected, your costs may be significantly higher.

How to Maximize the Value of Alternative Risk Financing

Alternative risk transfer strategies work best when combined with effective risk management. If you can prevent claims, you can enjoy significant savings. Best practices to maximize the value of your alternative risk financing strategy include:

• Carefully screening job candidates.
• Providing initial and ongoing safety training.
• Implementing telematics programs to monitor driving habits.
• Keeping up with trends in regulations and litigation.
• Reviewing risk management programs regularly.

Alternative risk financing isn’t a good fit for every company, but for some organizations, it’s highly advantageous. If your company is serious about risk management, and if you’d like to explore alternative risk financing strategies that could result in cost savings, reach out to Propel. We can determine whether you meet the minimum premium requirement, and we can also provide benchmarks and a captive feasibility study.

To learn more about whether alternative risk financing is a good fit for your company, contact Brandon Murrell.