Self-Insurance in Action: Large Deductible Plans - December 19th 2018

Large Deductible insurance plans are cool. I’m not sure why, I just think that. I’m Greg from Strategiq Risk Management, a risk and insurance consulting company that provides tools and strategies for reducing property and casualty insurance premiums for mid to large size organizations in Western Canada. Let’s dive in to why I like Large Deductible insurance plans and what that means for these companies (and yours).

Maybe it’s the idea of regaining a measure of control and thinking strategically; of not simply handing your insurance business over to the the behemoth brokers and insurers, and saying “tell me what I need, and how much to pay.” Large Deductible plans drive an organization to develop a stronger appreciation for the linkage between risks, accidents, injuries, financial losses, insurance claims and rising premiums. And while Large Deductible plans need to be thoughtful they don’t have to be complex.

Purpose of Large Deductible Plans

Save you money. Large deductible plans lower your organization’s cost of risk. Unless a strategy will save you money or make your organization a safer place, you probably aren’t interested. Neither are we. Large Deductible plans do both.

Property Deductibles vs Liability Deductibles

You likely never thought about it in these terms but property deductibles reduce your insurance coverage, while liability deductibles do not. It’s difficult to explain (for me) but easy to illustrate. A building may be insured for $500,000 in property damage, with a $50,000 deductible. This means that if the building is completely destroyed the owner will pay the first $50,000 and the insurer will pay the remaining $450,000, for a total of $500,000. As you increase the deductible, the amount that has to be covered by the insurer goes down accordingly (and so should the insurance premium). If that same building also has a liability policy for $500,000 with the same $50,000 deductible, the mechanics are different. If there is a third party injury and a resulting claim, the owner will still pay the first $50,000 but the insurer will contribute another $500,000, for total insured coverage of $550,000. In this instance, increasing the deductible does not reduce the amount covered by the insurance policy.

How Large Deductible Plans Work

Large Deductible plans are generally defined as insurance policies with deductibles of at least $100,000, per occurrence or per accident. Not per claim. This last part is important because, for example, a single accident that results in four injuries (and therefore four claims) could also result in the client having to absorb $400,000 in deductible expenses ($100K x 4). You do not want that; at least not unless it is being done purposefully and strategically.

Large Deductible plans are therefore hybrids of risk retention and risk transfer: losses up to $100K are retained by the organization, while losses above $100K are transferred to the insurer. They are seen most often with liability policies and workers compensation. An organization that retains a greater amount of risk requires a lesser amount of insurance coverage. With less coverage required, the client organization avoids not only unnecessary insurance coverage but also escapes the additional admin fees, risk loads, profit markup and broker commissions described in our blog of March 16, 2018.

Administration

The adoption of a Large Deductible plan does not eliminate the need for insurance broker and insurance company involvement however. Claims are still settled by the insurer, who then invoices the amount of the claim (plus an admin fee) back to its client (the insured). If the claim is under the deductible level (e.g. $100K) then the entire amount gets billed back to the client. The advantage to the client? The time it takes to adjudicate and process a claim allows the client to defer its cash outflow.

A variation of the Large Deductible plan is the Self-Insured Retention (SIR),in which the client does its own claims handling (adjusting and paying out losses) instead of running them through the insurer. Often this function is outsourced to a third party. SIR insurance policies almost certainly will require the client to report all claims to the insurer regardless of the amount, because of the potential for these “long tail” losses to eventually exceed the deductible limit. Long tail losses are things like personal injuries which result in a stream of payments, with the final tally not known with any certainty. Injuries for example can turn out to be more severe or complicated than first diagnosed, the injured party slower to heal, etc. The full and final costs of long tail claims are revealed only slowly, over time.

They Make Your Future Better than your Past

A large claim or a sequence of claims in any given year can wipe out the premium savings of a Large Deductible plan; that much should be obvious. But on average, that is, over the medium and longer term, the savings are certain and they will be substantial. So, as long as your organization’s future experience with insurance claims is no worse than its past you will save substantially. But your organization’s future is going to be better than the past. Why? Because knowing that you are absorbing the first $100,000 of any claim has a way of creating a desire to avoid having claims. And because setting up a Large Deductible plan requires an analysis of past claims and current risks. All of which paves the way for risk avoidance and mitigation strategies…leading to fewer incidents (losses and insurance claims). So stop thinking small and start thinking big. Large Deductible big.