Alternative Risk Financing
Meet the strategic needs of your company with customized risk financing options as an alternative to traditional insurance.FIND AN ADVISOR
Three Essential Considerations
Alternative risk financing can be a cost-effective option if it aligns with your company’s financial objectives. There are three concepts to consider before evaluating which insurance approach is right for your business, especially one that incorporates alternative risk financing techniques.
Your Company's Goals and Objectives
To determine if your business is a fit for alternative risk financing, you should understand:
- If your organization has a higher tolerance for assuming risk, both for individual losses and for a program maximum
- If you have the appetite to assume some of the risk and whether your business has a safety culture to control losses
- If your business needs to work on its safety program and if you are willing to devote the resources necessary to improve your program
All insurance plans treat cash flow in a specific way. One important question for the insurance buyer is "Where do you think your available cash is best put to use?"
The trade-off for retaining the cash flow benefit is that you will most likely have to offer some form of collateral to offset the cash that the insurer will not receive until a later date. That collateral usually takes the form of a letter of credit.
Mergers, Acquisitions and Private Equity
Is your business growing by expansion or an acquisition? Or, are you planning to consolidate or close locations? These decisions will affect whether you are willing to tie up your cash, or how much risk you agree to assume.
This is particularly important with a potential merger, as you likely do not want the complication of deferred claims on your balance sheet. A guaranteed cost plan may make more sense during a period of mergers and acquisitions.
If you are anticipating the involvement of private equity, either selling to a private equity firm or accepting their funding, guaranteed cost is almost always the better choice.
Alternative risk financing tools can potentially save your business money. These types
of plans are negotiable with your insurance carrier and can be customized to fit your organization's goals and objectives.
Retrospective Rating Plans (Retros)
Also known as Loss Sensitive Plans, Retros allow for the premium to be adjusted “retroactively” depending on your losses, subject to the plan’s minimum and maximum premiums. The plan is a mathematical formula with all plans sharing five similar components:
- Your losses, which are typically capped at a specific amount
- Claims handling expense to handle those losses
- The insurer’s administrative and overhead costs
- Excess premium which is the “risk sharing” component of the plan
- An amount to pay state premium taxes
Large Deductible Plans
Large Deductible Plans are similar to Retros and have the same basic plan components, including minimums and maximums. The differences:
- You reimburse the insurer for claims within the selected deductible, so Large Deductible Plans usually have greater cash flow benefits than Retros.
- There is no premium tax charged for losses within the deductible.
- Collateral is required to secure the losses which are yet to be paid, usually a letter of credit.
- There are minimal adjustments.
- There is potential to improve your cash flow because you don’t pay for the losses until the insurance company does.
Generally, Group Captives are formed by two or more companies to provide workers’ compensation and other coverages to their member owners.
With Group Captive plans, each member is an owner, so they have more influence over their program. Because of this influence, Captive costs are transparent to the insurance buyer.
A Captive also provides stability of future insurance costs for members who are willing to control their losses.
An actuarial assessment is critical
An actuarial assessment is important in understanding if alternative risk financing makes sense for your business.
Financial Statement Liabilities
When using alternative risk financing, you want to be comfortable in your ability to estimate financial statement liability for your retained losses.
It’s important to accurately estimate the future liability to your balance sheet for losses that you have a future obligation to pay, but have not yet been paid to the insurance company.
The key component of any form of alternative risk financing is your own losses. A loss forecast, an estimate of your expected losses, is a critical calculation.
Many businesses choose the size of their retention based on premium alone. A retention level analysis uses this same loss forecasting methodology, and would limit the amount of an individual claim at different levels.
This analysis can show you which retention level can reduce your total cost of risk, based on your actual loss history.
That same loss forecast drives collateral requirements. The collateral amount should be based on losses that are yet to be paid to the insurance company and should be determined by a mathematical formula.
OSHA COVID-19 Vaccination and Testing ETS Toolkit
At Johnson Financial Group, our team continues to monitor the ongoing situation related to the Occupational Safety and Health Administration (OSHA) emergency temporary standard (ETS).READ MORE about how our team continues to monitor the ongoing situation related to the Occupational Safety and Health Administration (OSHA) emergency temporary standard (ETS).
Alternative Risk Financing: 3 Essential Considerations
Retro plans, large deductibles and captives: potential cost savings to your current planDOWNLOAD WHITEPAPER Click here to download our whitepaper on three essential considerations of alternative risk financing.
Alternative Risk Financing: Options to Traditional Insurance
Take a deeper look into the alternative risk financing tools that could potentially save your company money compared to traditional insurance programs.DOWNLOAD WHITEPAPER Click here to download our whitepaper on the alternative risk financing tools that could potentially help save your company money.
Alternative Risk Financing: An Actuarial Assessment is Critical
An actuarial assessment is important tool to help determine if alternative risk financing makes sense for your company.DOWNLOAD WHITEPAPER Click here to download our whitepaper on why an actuarial assessment is an important tool when considering alternative risk financing options.
Your Alternative Risk Financing Advisor
As an independent insurance agency, our advisors are able to design, compare and present customized insurance solutions that help protect you and your organization.FIND AN ADVISOR