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Fall 2003
Barry Wells CCLA
Director, Insurance Industry Services
In its simplest form, insurance is
nothing more than a
promise between two parties
to fulfill a commitment. You, as
the insured or policyholder, agree
to pay a premium, to cooperate with
your insurer and to keep them
apprised of any changes related to
the risk they have undertaken. The
insurer or risk taker, on the other hand, promises to
honor claims submitted by the policyholder under the terms and conditions
of the insurance contract. Simple and to the point, right? Well, not always,
and that's why it’s so important to understand your insurance program, the
nuances of the coverage you have in place and what you may expect when
it comes time for the insurer to fulfill their promise.
A good place for us to start our discussion is to explore two common types
of insurance programs: Deductible Insurance Coverage and Self-
Insurance. (For the purposes of this discussion, our basis will be
commercial insurance as opposed to personal lines or life and health
coverages.)
Deductible Insurance Coverage Programs
Deductible Coverage is perhaps the most recognizable form of insurance
that many of us are familiar with. Insurance is secured specific to your
exposures, either directly from an insurance company or through an
independent broker who represents a variety of insurance companies.
Typically, and dependent upon the type of coverage underwritten by the
insurer, claims are paid after the application of a deductible and subject to
the terms and conditions of the insurance contract. The premium charged
is based on both the type and "quality" of the risk. For example, if you are
attempting to secure a liability form of coverage and you've experienced
claims in the past, the cost of your premium may be higher because of your
previous loss experience.
The primary benefit of this approach is that the insurer takes full
responsibility for the management of your insurance program, including
the claim process. This is an especially effective approach if you have
routine insurance exposures that you're attempting to manage. However,
unlike a self-insurance program, which we will discuss in a moment, you
will generally have limited control over the ultimate resolution of a claim.
Tips:
- Form a partnership between your broker and
the insurance company, especially the claims
department.
- Use your insurance broker effectively.
They are your primary advocate and liaison
with the insurance company.
- Appoint a primary contact for your insurance company to work with.
This is especially important concerning worker’s compensation claims.
- Understand your insurance company's reserve and settlement process.
You may only be responsible for the deductible; however, your loss
history impacts your insurance premiums.
- Learn about your insurance company's claim litigation program. What
law firms do they use and what can you expect if a lawsuit is filed
against your insurance coverage? Secure loss runs to assist you in
tracking loss information.
- Avail yourself of the insurance company's technology. Many insurers
now offer web access for their customers, which is another opportunity
to stay on top of your insurance program and claims activity.
- Communicate, Communicate, Communicate. The single most
important tool in forming an effective relationship with your insurance
company is frequent and ongoing communication.
Self-Insured Programs
Unlike a deductible insurance program, Self-Insurance involves an
approach by which you share in your own risk. That portion of risk that
you undertake to handle is called a self-insured retention (SIR). Excess
insurance coverage "sits" above the SIR to be available for claims that are
in excess of the SIR and subject to specific terms and conditions. Common
coverages for self-insurance may include workers' compensation, general
and auto liability, product liability and property. Self-insurance offers the
potential benefits of cost reduction and increased control over your overall
insurance program, especially claim management.
Self-insured programs are both regulated and non-regulated. Each state's
authorities that establish the regulations govern regulated programs. Much
of the focus is on the financial condition of the entity forming the self-
insured program, ensuring there is the financial capacity to securitize loss reserves that are within the SIR. This assurance is typically conferred through
cash, letters of credit and/or bonds. Note that workers' compensation and auto liability exposures can only be self-insured as regulated programs. Also,
be aware that the regulatory agency will be responsible for monitoring these programs. By comparison, non-regulated self-insurance offers a greater
degree of flexibility. A consultation with your insurance professional will help determine which program is the right match for your self-insurance needs.
Claim management is, of course, a key component to any insurance program and
equally as important as it relates to self-insurance. Unlike the
more traditional insurance relationships, such as the deductible
program where the insurance company manages the claims, as a self-insured
entity it is the self insurer that manages the claims within the
SIR. Typically, the self-insured will either establish an internal
claim department or outsource this responsibility to a Third Party
Administrator (TPA). The decision as to which option is appropriate
is largely driven by the size of the self-insured program, the types
of coverages involved and what regulatory requirements mandate.
Clearly, development of an internal claim department and/or the
selection of a TPA are critical decisions relating to the overall
effectiveness and success of the program.
Finally, as with any insurance program, the self-insured approach does come with some disadvantages. A regulated self-insurance program carries with it
significant administrative issues, including ongoing scrutiny of the claim management operation. Also, monitoring the loss reserve funding is critical to
ensure that the organization is not "surprised" by a significant claim settlement only to determine funding is somehow inadequate to pay a claim.
Both of these insurance approaches have their own distinct advantages and challenges. The key is determining what your insurance needs are by working
with your insurance professionals to evaluate and model a program that addresses your specific needs and affords you, your company and your employees
the appropriate insurance coverage as a component of an overall effective risk management program.
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