Insurance professionals and insurance customers have been brainwashed that insurance is all about price thanks to the insane amount of advertising done by insurance companies. A 2018 industry report by Broadcasting & Cable claims Insurance — both auto and general — was the second-largest advertising category on TV (topped only by automakers), with an estimated spend of $3.9 billion, making it responsible for 6.1% of the total advertising spend on TV. That budget was spread out across 43 brands, which ran 549 ads 1.4 million times, generating a massive 272.7 billion TV ad impressions, or 4.3% of all impressions this year. I am pretty sure every single one of those ads promised savings.
For years I have said “The most expensive policy is the one that doesn't pay claims.” Technology is changing the insurance value chain. At the InsurEco Lab we constantly talk about a future of insurance “singularity” where the entire insurance marketplace is accessible to all insurance professionals. We are moving from this outdated model of how much money I can save on my insurance to a I paid for my insurance now cover me. This can only be done when the insurance professional becomes an educated and dedicated risk manager. Alternative Risk Transfer or ART is a potential offering to consider for insurance customers.
According to IRMI Alternative Risk Transfer is financing risks outside of the commercial insurance regulatory system, which is designed to protect unsophisticated insurance buyers. Also refers to transferring risk using nontraditional methods—for example, combining insurance and noninsurance techniques. There are several methods used to protect individuals and businesses from risk. Traditional insurance is the marketplace we are all familiar with.
A growing segment in the industry are captive insurance programs. A recent article by Dan Duncan from Mountain West Premium Finance suggests “The pure captives industry has seen explosive growth over the past 30 years—the number of pure captives has grown at a rate of 600 percent and continues to soar.” Insuranceopedia defines a captive insurance company as a wholly owned and controlled subsidiary created by another corporation, known as its parent company, to insure itself against certain risks to which the parent company is exposed to. Aside from protecting the insured parent company and the parent company’s clients against certain risks, a captive insurance company also benefits from the profitability of the captive insurer. These captives can be either a single parent meaning they only provide risk transfer for one organization or a group which would consist of shared ownership amongst similar organizations.
The Liability Risk Retention Act of 1986 brought about an alternative to the traditional insurance marketplace due to skyrocketing insurance prices. The federal law gave birth to new methods of obtaining insurance in the form of Risk Retention Groups (RRG’s) and Risk Purchasing Groups (RPG’s). These vehicles are still frequently used today. “The policyholders of the RRG are also its owners and membership must be limited to organizations or persons engaged in similar businesses or activities, thus being exposed to the same types of liability (source wikipedia).” RPG’s leverage group purchasing power from a traditional insurance company and typically involve issuing one master policy to the entire group with each company receiving a certificate of insurance.
Gallagher defines an insurance pool as “An insurance pool is a multiple-member, risk-sharing arrangement where government organizations pool their funds together to finance an exposure, liability, risk or some combination of the three. Rather than purchasing insurance, employee benefit and risk management services share funds to procure services and insurance as a group through traditional insurance providers, pools and cooperatives.”
The complete alternative to insurance is Self-Insurance. Simply put, anytime you don’t transfer risk to one of these vehicles, you are in the self-insurance business. Some risks like vehicle liability and workers compensation are highly regulated. Although the government may allow for a form of self-insurance, there still has to be evidence of financial responsibility by the self-insured entity. The primary reason why insurance is required is that it protects the public from any loss created or in the event of an employer and employee related injury the insurance provides the exclusive remedy which prevents litigious problems and lengthy resolutions.
Next week we’ll dig into risk financing, cost of risk and new methods of risk transfer. I look forward to the next edition of BLOCK LETTERS.
Thank you for the investment of your time. I hope to give you a good return on our relationship.
