All companies face the risk of accidental losses. There are two basic options for managing this risk: risk transfer and risk retention.
Many companies transfer risks by purchasing an insurance policy. By paying a specified premium, any company that transfers to the insurance company may risk certain types of losses. The insurer assumes that the risk of loss may exceed the premium amount it collects from the insured.
The business also has the option to transfer the risk via the compensation agreement in the contract. In a compensation agreement, one company agrees to compensate (compensation) another for the costs of certain types of claims or lawsuits.
Risk Retention (Self-Insurance)
Many companies choose (or are forced by the insurance company) to keep some of the risks. Risk retention is often referred to as self-insurance. In general, large companies have more options with regard to self-insurance than small companies because large companies have greater capacity to absorb losses. However, small businesses still have many benefits of risk-holding, albeit on a smaller scale.
Advantages of risk retention
One of the major benefits of risk retention is the low cost of insurance. Assuming some risk, you can keep some of the money that you would have paid the insurance company. Self-insurance gives you more control over the risks you keep.
And since you will be paying some of the losses out of pocket, you may try very hard to prevent them from happening.
Disadvantages of retention risk
Risk retention provides some disadvantages. One is that your costs may be greater than you expected. For example, if you specified $ 5,000 for your property trade policy, you probably wouldn’t expect to incur a loss of $ 4,999.
Second, retention of risks can lead to administrative trouble. Suppose you decide to insure physical damage coverage for your fleet of trucks. If the truck is damaged, you will have to handle the repair-related tasks (such as locating a reliable repair shop) yourself rather than relying on an insurance company to perform these tasks on your behalf.
Types of retention risk that small businesses use
Here are some options for small businesses to keep risk:
Discounts are a common way to keep risks. It can be an effective tool to lower your premium if you have the financial resources to pay some losses out of pocket. Reduced amounts are used for many types of policies.
Deductible amounts are often used in policies that provide first-party coverage such as commercial real estate and automatic material damages. When the deduction applies, the insurance policy will not cover any losses less than the deductible amount. When the loss exceeds the deductible amount, the insurer usually pays you the difference between the loss amount and the deductible amount.
Public liability or liability coverage Removable amounts can also be used in property damage claims under commercial or public liability claims.
For example, trucks used to transport gravel can generate many small liability claims for cracked windshields. Thus, a company that haules rock or other cosmetics on trucks might purchase a trade policy for cars that includes a $ 1,000 deductible royal damage. When the claimant claims compensation for a cracked windshield, the gravel company pays the insured directly to the claimant if the amount requested does not exceed the deductible amount.
Note that liability policies covering small business owners are unlikely to include a deduction that applies to bodily injury claims. Claims for compensation for bodily injury can get out of control if not managed properly. Hence, insurance companies prefer to handle these claims on their own.
Workers ‘Compensation Many states have agreed to use small, deductible programs for workers’ compensation insurance.
These programs vary from state to state. In some countries, the “small” discount may range from $ 500 to $ 75,000. The amount may be deducted for medical benefits, compensation, or both. It may or may not apply to loss adjustment expenses. Some states require insurance companies to offer a small discount to any employer who qualifies for one. In other states, insurance companies are permitted but not obligated to offer a small, deductible plan.
A small business owner wanting to purchase workers’ compensation coverage with a small deduction may be required to provide evidence of financial security such as an irrevocable letter of credit. The deductible is usually added to a standard worker’s compensation policy through validation.
Keep self insured
Insured Self Retention (SIR) is used in liability and worker compensation policies. Like a deductible, SIR represents a specified amount of risk that you agree to keep. There is one difference between the two regarding claim expenses. These expenses do not usually reduce the opponent but can reduce the SIR. Also, when a claim is subject to deductible, the insured usually has control over the defense. When a claim is subject to SIR, the insured may control the defense until the SIR is exhausted.
Most policies bought by small businesses do not include guaranteed self-retention. Two exceptions are the umbrella and the errors and omissions policies. Many umbrellas have a SIR that applies to canopy claims rather than basic insurance. For example, your umbrella may cover a complaint alleging mental pain (by definition of bodily injury) but not through your public liability policy. The SIR index usually applies under the umbrella of a public policy for damages but not expenses for claims.
Managers, employees, hiring practices and other types of errors and neglect policies may include a SIR policy. SIR may apply to both damages and defense costs.
In some states, small and medium employers are permitted to self-insure their own compensation obligations on a group basis. This option enables small businesses to obtain many self-insurance benefits. State laws specify minimum requirements for a group self-insurance program. Usually, self-insured group business owners must operate similar types of businesses. To find out if self-insured group insurance is an option in your state, consult your agent or the state insurance department.