Product Update

Small and Large Deductible Plans and Collateral Discussed in Risk Financing

This release of Risk Financing updates the discussions on small deductible plans, large deductible plans, and the collateralization of risk financing plans.

Small deductible plans are utilized mainly to accomplish two goals.

  • 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. The discussions explain how the plans work for these lines of coverage, the range of deductibles permitted, and the discounts insurers may offer.

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. This discussion describes the advantages and disadvantages of large deductible plans, provides some 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.

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 deductibles 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. In "Collateralizing Risk Financing Plans," a number of the most common forms of collateral and some advantages and disadvantages of each are explained.

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