Now is the ideal time to be proactive with your options while adopting a mindset of managing and financing risk versus buying insurance. Between the low risk, low reward option of first dollar guaranteed cost insurance and the high risk, high reward concept of self-insurance, lies several programs that may work for your operation.
By Lauren Fronczek
Proactive waste and recycling operators understand there are many options available when it comes to risk financing. However, assessing risk appetite and understanding the different options can be daunting. The most effective operators work with their insurance agent and carrier to take control of their insurance program and develop a comprehensive well thought out plan that allows them to turn risk into a competitive advantage. In order to provide the widest array of risk financing options, it is crucial to work with insurance advisors who specialize in your industry.
Insurance is a highly cyclical business where several external factors can affect your premium level. From swings in the investment market, catastrophic events, highly publicized accidents, and changes in underwriting appetites, it can be a challenge to control and understand one of your top operating costs. Between litigation funding, large jury verdicts, and a constant barrage of advertisements imploring the public to get their share, it is a very challenging time. The good news is that there are more advanced insurance options today than ever before and there are resources to help you understand all of them.
What Can You Do with Risk?
There are four basic methods to manage risk—avoidance, reduction, transfer, and retention. Risk could be avoiding by not operating, which is not a very good option if you want to stay in business. A more plausible way would be avoidance of certain types of risk. For example, you may decide to pass up a contract because the risk involved with taking it is not worth what they are willing to pay. In other words, the risk is not worth the reward.
When it comes to risk reduction, you should lean on your insurance advisors to help with loss control. There are many best practices that will help you reduce risk, and an expert insurance agent and specialty insurance carrier can help you decide which will have the greatest impact. A few options to consider include:
- Physical Abilities Testing (PAT) Program: Do not hire your claims. PATs are a fantastic way to determine if your employees can perform the essential functions of their jobs and can make a significant impact on your workers’ compensation claims and associated expenses.
- Return to Work (RTW) Program: An effective RTW program will keep your employees engaged while offering an opportunity to continue working in a modified light duty environment as they recover. Again, this may reduce the cost of a workers’ compensation claim.
- Automated Event Recorders (AER): Through proper use, AERs can reduce unsafe driving behaviors, mitigate claims costs, and help you take a proactive approach to your safety program.
- Formal Defensive Driver Training: According to the CDC, motor vehicle crashes are the leading cause of work-related deaths in the U.S.1 All drivers should practice defensive driving skills to help avoid the dangers caused by other motorists.
When it comes to transferring risk, guaranteed cost or zero deductible insurance is a basic risk transfer mechanism where the operator pays the insurance premium to the carrier in exchange for transferring all of their covered risk for a set premium. Under this scenario, the insurance carrier benefits if claims costs are lower than they are priced for, and the insured has the peace of mind of transferring all risk covered by the policy.
On the other end of the spectrum from transferring all risk is retention or self-insurance, where an operator assumes all exposures. In the middle of these, there is a world of possibilities where the insured takes on some level of risk in exchange for the opportunity for reward if claims costs are lowered.
Deductibles are a common option that provides some middle ground, whereby your organization can take a reasonable amount of risk while still insuring away most of the exposure. Deductibles provide the immediate benefit of lower pay in costs to account for the risk assumed by your organization. A downside of this arrangement is many insurance carriers will require collateral to protect against their credit exposure and often there is no limit to the amount of deductible reimbursements your company may incur.
The Best of Both Worlds
While certainly not for everyone, captive insurance is an option that provides the best of both worlds for the proactive organization: a palatable level of risk that oftentimes includes defined best- and worst-case scenarios, allowing organizations to take advantage of their favorable claims experience. While all captive programs differ, customarily a portion of the insured’s premium is set aside in an investment account that functions like a checking account where losses up to a certain level are pulled out as they occur. If there are extra dollars in the account after the accounting cycle, those funds may be returned to the company. Conversely, if losses exceed the amount in the fund, the company may need to contribute additional funds. The most common captive approach for medium-sized operations is to band together in a group with like-minded safety conscious companies to share in that risk and reward. This mutually beneficial relationship where the captive members share in risk and reward creates alignment with the insurance carrier and agent that is not present with many other options. More and more better operators are flocking to this approach, leaving those in the traditional marketplace forced to subsidize each other.
Some benefits of captives include a closer relationship with your insurance program, long-term control over your risk financing, and ideally a removal from the swings of the traditional marketplace. Captives may also come with an increased level of servicing and safety focus that raises the performance level of all risk takers. The potential downside consideration for this approach includes a higher time commitment to your insurance program, increased safety expectations, and the potential to pay additional premium if losses exceed expectations. Your insurance agent will need to be well versed and able to outline the differences between rental versus owned programs, group versus individual, homogenous versus heterogeneous and so forth. While they may seem complex on the surface, alternative risk transfer programs may provide the long-term control and stability while allowing you take a palatable level of risk with the peace of mind of a defined worst-case scenario.
A World of Possibilities
Now is the ideal time to be proactive with your options while adopting a mindset of managing and financing risk versus buying insurance. For wise organizations, long gone are the days of buying a policy and not doing or expecting anything for the next 365 days. Operators that bury their head in the sand and ignore risk mitigation tools will be left with high rates and limited options. Between the low risk, low reward option of first dollar guaranteed cost insurance and the high risk, high reward concept of self-insurance, lies several programs that may work for your operation. Each option requires careful consideration, but if you dig in carefully with your agent, you may find several appealing options t
hat you had not thought of previously. | WA
Lauren Fronczek is Assistant Vice President of Specialty Transportation for National Interstate Insurance. If you are interested in discussing insurance options or learning about WasteCap, National Interstate’s rental captive solution specific to the waste and recycling industry, she can be reached at (800) 929-1500, etx. 1141 or e-mail [email protected].
Captives may involve a risk of loss. Policies are underwritten by National Interstate Insurance Company and Vanliner Insurance Company, authorized insurers in all 50 states and the D.C.; National Interstate Company of Hawaii, Inc. an authorized insurer in HI, MI, NJ and OH; and Triumphe Casualty Company, an authorized insurer in all 50 states and the D.C, except in MI, NJ, NY and WY, 3250 Interstate Drive, Richfield, OH 44286.
“Motor Vehicle Safety at Work.” www.cdc.gov/niosh/motorvehicle/resources/crashdata/facts.html. N.p. 22 September 21. Web 14 January 22.