Most medium-sized and smaller companies protect themselves against their property and liability exposures by purchasing Commercial insurance, while large corporations and government agencies prefer to use some type of alternative risk financing. However, businesses of any size can employ this tool to enjoy such benefits as improved cash flow and a lower total cost of risk.
Insurers have developed a number of colorful terms for alternative risk financing techniques. These methods include:
- Excess insurance
- Reinsurance
- Guaranteed cost
- Retrospective rating
- Large deductible
- Self-insurance
- Captive insurance
Using alternative risk financing requires management discipline and a willingness to commit resources. Size isn't that important. The main criterion is losses. As a rule of thumb, alternative risk financing makes sense for a business whose claims have these characteristics: (1) Reasonable predictability; (2) moderate volatility; (3) minimal exposure to a catastrophic event; and (4) high frequency and low severity. For example, a large hotel or bank would probably experience a number of small Workers Compensation claims, but few large claims.
Casualty insurance products (such as Workers Comp, General Liability, and Auto Liability) are the best candidates for alternative risk financing. Because Comp and Liability claims tend to be paid over one to five years or more, insurance companies that write these policies generate substantial investment income on their premium reserves until losses are paid fully. By using alternative risk financing, your company can invest your funds elsewhere, rather than paying premiums.
Our specialists would be happy to review your business and see if alternative risk financing make sense for you.