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New "Risk Financing" Update Focuses on Deductibles and Collateralization

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July 08, 2019

Is your organization looking for self-insurance qualifications for automobile liability, insights into small deductible plans and large deductible plans, or information on considerations for collateralization of risk financing plans?

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Look no further. Access Risk Financing for this information and more.

Self-Insurance Qualifications for Automobile Liability

The summaries in Appendix C of Risk Financing provide an outline of each state's regulations governing self-insurance for automobile liability, including the following.

  • State agency contact information
  • Governing statutes with Web addresses if available
  • Requirements for the minimum number of vehicles
  • Filing instructions and fees
  • Net worth and security requirements
  • Requirements for excess insurance
  • Special provisions

Insureds often utilize large deductible plans or fronting arrangements. Both allow insureds opportunities for cost savings without the additional administrative burden of complying with self-insurance requirements.

Small Deductible Plans

Insureds utilize small deductible plans mainly to accomplish two goals, as follows.

  • Controlling cost through premium savings
  • Providing meaningful and effective incentives for safety and loss control

Insurers can benefit from the plans by avoiding frequent, small claims while retaining control over how claims are handled. However, the insurer also retains the obligation to pay claims and must rely on the insured for reimbursement of amounts within the applicable deductible.

The programs are widely available for general liability, automobile liability, and workers compensation. Workers compensation small deductible programs are closely regulated by the states that allow them. Risk Financing explains how the plans work for these lines of coverage, the range of deductibles permitted, and the discounts insurers may offer.

Collateralization of Risk Financing Plans

Insurers that underwrite loss sensitive programs typically require some type of collateral as protection against the credit risks they assume. The combination of the widespread use of large deductible programs plus more restrictive practices by financial institutions has made collateral requirements one of the most critical considerations for insureds that utilize such plans. Collateral is typically in the form of an escrow fund, a trust, or a letter of credit. Risk Financing covers a number of the most common forms of collateral, and some advantages and disadvantages of each are explained.

Large Deductible Plans

Nearly all states have approved the use of large deductible plans, and they are offered by most insurers. The premium credits can be substantial but are subject to change and negotiation depending on the deductible level, current market conditions, regulatory climate, and the nature and size of the insured. Just as for other risk retention schemes, however, the retained risk must be predictable, quantifiable, and, most importantly, worth the risk/reward trade-off. Risk Financing describes the advantages and disadvantages of large deductible plans, provides examples of how they compare to other rating programs, and lists some basic regulatory requirements for such plans in the states where they are allowed.

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