The Allure Of The Alternatives

Your insurance costs have been increasing, your insurance company services have been declining. Commercial insurers will tell you that long-term relationships are important, yet those same insurers seem to be in the market one day, and out the next. Particularly in tight markets, many of those abandoned or mistreated by their commercial insurers are looking for alternatives.

For several years now, Workers' Compensation Self-Insurance Trusts have been growing in popularity. One look at their promotional materials, and it's not hard to understand why. Most will tell you that reduced overhead, strong accident prevention and group homogeneity will minimize expenses and reduce premiums. Then there are those that go for the clincher when they say things like "savings up to 40% off modified premium with no direct State Assessment fee."

Reciprocal insurance companies offering a wide range of insurance coverages are growing in popularity as well. One such company's motto is "Insuring our own future" (signifying that everyone is in it together). Insurance buyers are also selecting from alternative providers such as Reciprocal Risk Retention Groups, Risk Retention Groups, and so forth. Essentially, all of these alternative risk transfer mechanisms have (or claim to have) one thing in common: they are there to insure and serve their own members.

For many, these alternatives make sense. Nevertheless, as with any risk transfer method, careful analysis of financial strength and the scope of insurance protection that is provided is vital. For those considering such alternatives, some issues to bear in mind are offered.

• Make sure that you have a complete understanding of joint and several liability. One promotional web site for a Workers' Compensation trust wisely advises the public, "due to issues of joint and several liability, a Group Trust option may not be the best option for some businesses." Understanding that each member is responsible for the financial well being of all the others is critical to deciding which group you want to join and whether or not you really have the appetite for that risk. Similarly, you need to be prepared for the potential of assessments, in the case of reciprocal insurance companies. Not all of these alternative companies are rated by A. M. Best Co. or other similar rating insurance company organizations either, necessitating a more in-depth review of financial statements.
• Many of these group alternatives may meet your financial requirements or standards, but will they meet the minimum requirements established by commercial insurers that may be needed to provide excess coverage above them? Excess markets often establish minimum Best ratings and financial size categories and will not offer excess coverage to those alternative groups or trusts that fail to meet those standards. Be sure to verify that excess coverage, if needed or desired, will be available above the alternative risk transfer method you select.
• The decision to use such alternative risk transfer methods should be done with a long-term commitment in mind. Nevertheless, be aware of any potential penalties or additional costs that may be levied in the event you leave the group or company. How will your liability for incurred but not reported claims be determined? How will open claims be handled after you leave and will your responsibility for your own claims be any different after your leave?
• Be sure to verify the scope of insurance protection you will be buying. Worker's Compensation coverage is statutory, so you need not be as concerned about the scope of that coverage (unless you need special coverage extensions for special exposures or coverage for out-of-state exposures that are probably not available from the trust). Other coverages, however, can be problematic. Member-owned companies often say that, unlike traditional insurance companies, they will bend over backwards to pay claims. They often favorably compare their scope of coverage with that of commercial insurers and cite only the advantages of their coverage forms, rarely the limitations. In reality, the scope of coverage afforded by some of these alternative markets can be inferior to that available from the commercial insurance market, so a thorough examination of the coverage forms is essential. A member-owned company may adjust some claims or losses more liberally, but there may be more claims that are simply not covered or are not covered adequately. In addition, some of the alternative companies will include mandatory arbitration provisions in their coverage forms, thereby eliminating any favorable court decisions to support claim and coverage disputes.

Alternative risk transfer methods are certainly worth pursuing. As with commercial insurers, though, some alternatives will be better than others and all deserve a careful analysis.

-- Charles H. Cox

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