As premium rates continue rising most of us are trying to find ways to reduce our insurance costs. Deciding to drop coverage on some items is one way of reducing your insurance expense. Another way is to reduce the amount of coverage you secure for the items you do insure.
Most consumers are familiar with deductibles on our automobile and homeowners policies. A few people may buy coverage with no deductible at all but these policies carry the highest premiums. By using deductibles, a consumer can reduce the cost of their insurance. And the higher the level of the deductible, the more they can reduce their insurance cost because they are absorbing a portion of the cost of any loss they might experience. For example, automobile policies usually have $500 deductibles for comprehensive and collision coverage. Although that level of deductible may produce a reasonable premium cost for a policy, if the buyer increases the deductible to $1000 or more, they can significantly reduce the overall cost of their policy.
Business entities can also reduce their costs by using deductibles as well. Deductible levels of $1,000, $2,500, $5,000 and even $10,000, are used by many businesses to reduce their insurance premiums for their property and automobile coverage. With workers’ compensation policies, some companies will use even higher deductibles to reduce the cost of their coverage. In workers’ compensation, it’s not unusual to see deductibles of $50,000 to $250,000 for a policy. This can reduce the cost of the policy by a substantial amount.
When using a deductible, the insurance company settles any claim then reduces the amount of the payment on the claim by the amount of the deductible. For example, if you have a $1,000 deductible, a $3000 claim would net a payment of $2000. ($3000-1000=$2000)
The benefit of the deductible is that you reduce your premium cost, although you now have the obligation of paying a portion of the loss should a loss occur. Another advantage is the insurance company actually handles the claim, using their adjustors and resources. The insured does not need any knowledge about claims handling or settlement procedures, as this is handled by the insurance carrier. This is particularly important with workers’ compensation claims since that line of insurance is highly regulated.
A similar but quite different approach to reducing premium costs is using a self-insured retention. This feature can be used on many high cost business policies. This is similar to a large deductible except that the insurance company is not involved in handling any claims that occur under the retention or deductible level. Handling and managing the claims under the retention level is entirely under the control of the business entity. The business entity handles all aspects of the claim on its own, using its own employees or by hiring independent adjustors to handle the claims.
This strategy can actually save the business owner more money than a high deductible plan because the insurance carrier is not spending dollars to handle any claims under the retention level. For example, a business might have a self-insured retention of $10,000. All claims under that amount would be handled by the business owner and would not even be reported to the insurance carrier. This type of coverage works well for a company that has the resources to deal with small claims or believes it can reduce the number of small claims so that it has very few of these claims. Insurance from a carrier is only applied to very large claims that exceed the retention level.
In addition to reducing the cost of insurance, these claims do not show up as part of the loss experience for the business. When the business policy renews, claims under the retention level are not included in the business loss experience. With the improved loss experience, the business represents a more attractive risk to insurance carriers. These carriers are more likely to offer quotes for the business and at better rates. The downside of self-insured retentions is the extra cost and attention the business must use to handle the small claims it incurs. Also, if it lacks the knowledge and experience in handling these claims, it may end up paying more than it might have if it utilized the resources of an insurance carrier with a high deductible plan.
Both high deductible plans and self-insured retentions can be used by businesses to reduce their insurance costs. Companies need to be aware of the pros and cons of each of these techniques and apply the appropriate resources in dealing with claims under the deductible or retention levels in order to get claims settled correctly and to avoid potential regulatory issues. Western Growers Insurance Services can assist members with questions about either of these approaches. If you would like more information contact Greg Nelson, assistant vice president of Commercial Lines at WG’s headquarter office in Irvine or contact your local WGIS representative for more information.
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