When you get closer to knowing how to insure your business best and get your money’s worth, the answer can still seem so far away. Buying insurance is already difficult. Unfortunately, the industry is designed that way.
When your business is struggling in the traditional market, it’s natural to want to learn about alternative options that are best for it.
Stepping outside the comfort zone of standard insurance brings challenges and questions: How much risk can you realistically take on? Are the savings worth the increased exposure?
ReNu Insurance Group specializes in helping answer these tough questions. We’ve helped more than our fair share of businesses determine which insurance options best fit them, whether inside or outside the traditional insurance market.
In this article, you’ll learn about alternate methods of insuring your business outside of the traditional market. This will help you determine which best suits your needs.
Should I consider alternate plans in the traditional market?
It depends, and sometimes by line of business. There have been many retro plans in workers’ comp policies where you have a loss factor, and the carrier says, “If you have claims over [insert amount], we’ll charge you. If it’s under that amount, you have a good deal.”
Self-insured Retention is suitable for professional liability or property policies, especially if your business isn’t big enough for certain alternatives. That said, you still need to manage your risk well so that you can cover losses up to a certain amount on any one occurrence. So, if you have multiple occurrences, you’ll be paying more.
High deductibles eat into the frequency layer of your insurance carrier, saying, “The insurance company is only going to step in when something really bad happens.” If you understand how the price of insurance relates to the carrier's layers of risk, the beginning is the expensive part.
If you have a $1,000,000 general liability policy, the exposure is really in the first $300,000 of the limit. It’s common to see clams from $1-$300,000. By taking a $300,000 deductible, you eliminate the risk from the carrier. Essentially, you are making this a catastrophic or severity policy and getting a reduction in premium for taking on more risk. The first $300,000 in coverage costs a lot because the carrier will not go north of $400,000.
Read our article Insurance Strategies for Business Owners in a Bad Market to learn more about these plans if you want to stick with the traditional insurance market.
Knowing Alternative insurance options for your business
Whenever you go out of guaranteed cost, you’re in the territory of alternative risk financing. A high deductible plan, self-insured retention (SIR), and retrospective plans are in the same bucket. They’re all another way for you as an insured to take more risk on yourself and beat your carrier at their own game (sort of).
The whole point is you take on more risk to pay less to the insurer.
Whether you’re going to own one of these plans, they all have their good and bad. However, something to keep in mind is that your carrier is still going to set the rate. Even though you’re taking on more risk, they’re selling the policy. So, if you go with something like a high-deductible plan, you can still see a premium increase since they set the rate.
If you want to stay in the traditional market, that’s okay. Maybe compromising with your carrier for a better deal is best for you and your business. It’s up to you to decide that.
Just know you can also consider two alternatives outside the traditional market.
1. Can you self-insure your business?
When we say self-insurance, it isn’t really insurance. This means you’re willing to accept the risk and financial responsibility if you have a problem.
Unfortunately, there are certain things you can’t self-insure since the government requires you to have some financial responsibility for something like workers’ comp or auto liability. But you can say something like, “You know what? I’m not going to buy general liability for my store because it’s too expensive.”
Fun Fact: Back in the 1980s, general liability policies were so expensive that companies couldn’t afford them. So, Congress created the Liability Risk Retention Act to combat these costs.
Most people think with self-insurance: you know what, I’ll just put money into a bank account. If you do that, there are still negatives to that idea:
- You still have to pay tax on that money. The IRS doesn’t see that money as anything other than profit.
- You only get to deduct payments for claims as business expenses against income.
- The money sits in the account and doesn’t exactly do anything good. Yeah, you’re building a war chest, but you need to ask yourself: “Is this worth it?”
So, self-insurance may or may not be the best option for your business. It’s completely up to you.
2. Have you heard of captive insurers?
Don’t be deceived by the name. Your business isn’t being taken captive for insurance purposes.
All the previous examples and captives have one thing in common: you are taking on more risk with your business.
Captives are like a form of self-insurance in the eyes of the industry (without actually being self-insurance). You’re taking more risk on yourself, like with high-deductible plans, self-insured retention, or retrospective plans. The difference is that you’re outside the traditional market and own the insurance company, which is the coolest part, whether you’re in a single-parent or group captive.
Oh, and rather than the insurance carrier pocketing the money from your premium, YOU can profit. You’re rewarded for minimizing claims because you’ve created more robust safety and risk management programs in your business.
Anyone already doing a high deductible, self-insured retention, or retrospective plan has the mindset to be on the right track to join a captive.
A well-run business that is entrepreneurial, willing to take on risk, and financially stable should, at the very least, consider captives a viable alternative.
But let’s make something clear: captives aren't for everybody. There are plenty of businesses that spend enough money and would rather pay a flat cost and not take on any more risk. And that’s okay.
For more in-depth knowledge about captives, download our guide to see how they benefit businesses.
Learn more about captive insurers
Again, the captive approach isn’t for everyone. However, if you’re willing to take on more risk in the traditional market, you’re doing yourself a disservice by staying blind to the captive approach. There are more possibilities for you than you realize.
Learn more about the captive market by reading our article What is Captive Insurance? Definition, Types, comparison to Traditional Insurance. And understand their general advantages and disadvantages to see if this insurance option works for you.
And if you are wondering how your business would do in a captive, take your captive assessment to get your results.
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