Have you ever wondered how utilizing captives, a high deductible insurance program, alternative risk transfer, self-insured retentions, or retrospective rating plans could further reduce your commercial insurance costs off your already low commercial insurance rates?
Too often business owners are chasing the wrong rabbit. They think that by purchasing their commercial insurance for less than they spent the year before is they accomplished their goal. We get it, it’s an easy benchmark to measure. If you succeed it’s a win; all be it a hollow win unless you really understand what you gave up to get that cheaper price.
Their real goal should be to lower their “Costs”, not the price of their insurance program. Nothing is more expensive to your balance sheet than cheap insurance.
The second huge mistake we see is that although their company has grown, sometimes significantly over the years, they are in essence the same insurance program they were when they were 20 employees; now they are 250, a thousand employees, and yet the commercial insurance is structured in the same way as when they first started.
This is a huge mistake because they are not leveraging their size and scale to reduce their insurance costs. I’m not talking about getting a lower rate because your sales are now at 100 million versus 10 million. That’s actually the illusion the commercial insurance market is selling. They are letting you feel like your reducing costs because of your scale; except they are holding back the best stuff only if you are smart enough to ask. We did a whole piece on the WHY they hold this information back in our “MISALIGNED GOALS” segment. Go there if you want to understand why.
For our purposes focus on the “HOW. First off we are assuming you have strong financials and a solid balance sheet. If you compare your balance sheet today with what it was 20 years ago, it’s probably night and day. Assuming you have solid free cash flow, credit lines, and cash reserves the question becomes, why are we buying so much insurance in the first place? To be clear I’m not talking about insurance limits. That stays the same due to your contractual obligations to your customers and lenders.
Leverage Your Balance Sheet To Reduce Costs At Scale
By leveraging your balance sheet you could restructure your present insurance program to incorporate some “risk-sharing” through higher retentions than by purchasing a “first-dollar plan. In a “first-dollar plan” the insurance carrier funds the loss from the “first dollar”. Any smart CFO worth their salt knows that any insurance coverage accessed for claims is essentially a credit line in reverse, except the interest rate on that credit line is crazy-expensive.
By increasing your retentions you score a lot of runs with one swing of the bat, pardon the baseball analogy. It’s called a grand slam. As your retentions increase the insurance marketplace looks at you entirely different than simply a purchaser of insurance products. You become a “Risk Partner” with them. This is important because the smart insurance carriers know that when you the end-user has “skin in the game” you generate significantly more underwriting profits than those that simply purchase first-dollar insurance plans. For this risk partner relationship, they give you significant discounts off the total premium for your risk sharing. A first dollar or low deductible insurance plan can never discount their rates low enough to get to the risk-sharing discounts.
Retaining Your Risk
Secondly, you purchase less coverage; the same limits, because you’re retaining some of the risks through deductibles or retentions. How you structure that retention matters. That’s another article. You can check out our quick piece on The Difference Between a High Deductible v.s. Self Insured Retention Since you are purchasing less your costs drop far more than just fighting for a lower rate. By taking higher retentions you can lower your costs by magnitude over just getting a lower rate.
Lastly, you can get access to a whole other section of the commercial insurance marketplace that caters to “Alternative Risk Financing” than you would otherwise have access to. You would never see a quote from this marketplace at the lower retention limits because that is not their appetite. They want larger, middle-market companies that want to be risk-sharing partners and not just insurance product providers.
Once you get a taste of what this looks like and how it can benefit you, then you will be tugging at our shirttails for a CAPTIVE STRATEGY.
So if you have been swimming at the same watering hole for years, with the same broker, and the same insurance carriers quoting you every 3 years we suggest you seek a whole new oasis. Call a Risk Advisor today, with 5 simple questions we can test whether this is an option for you.
