A large deductible program can have many benefits for an employer and works like a traditional guaranteed cost plan with a special deductible endorsement. It is designed for large employers that have the capacity to shoulder some risk and be responsible for a portion of their losses. The size of the deductible for these plans is generally in a range from $100,000 to $1,000,000 per occurrence. Here, we will highlight program specifics, advantages and disadvantages, and deductible plan options so that employers can have a true understanding of large deductible plans as a whole.
Reduction in the up-front premium improves cash flow and has potential tax savings
Goal is to have premium savings which will exceed that of the claim costs in a given year
Retains the services of an insurance carrier
Rewards insured for maintaining an effective risk control program
Catastrophic per accident/occurrence loss limitation is included in the structure of the plan and protects employer from higher-than-expected claim costs
Poor loss experience can create an ultimate cost that is greater than a guaranteed cost plan
Unpredictable timing of deductible reimbursements as they are made as claim costs are realized and billed
Financial security required
Numerous years of deductible policies may stack collateral and affect available lines of credit
Understanding large deductible collateral
Large deductible collateral serves as a secondary payment mechanism in the event of default or non-payment by the insured of the deductible. It is a secondary requirement that is only activated if the insured defaults on their program commitments. Since claim costs that fall within the deductible are paid by the insurer and reimbursed by the insured, collateral is needed to secure the promise of reimbursement. Insurers are in the business of underwriting risks, not taking financial risks. The collateral is generally set to match the loss forecast within the deductible and is based solely on what the insured is expected to have to pay. Sometimes it can be discounted and sometimes surcharged depending on the financial condition of the insured.
What is a pre-funded deductible plan?
These plans function similarly to a traditional large deductible. However, the method of collateralization is different. In the case of a pre-funded deductible, the insured is required to remit cash in the amount of the estimated loss reimbursements. This fund is used to secure the estimated liabilities and acts as a “working fund” to cover monthly reimbursements. Employers are able to avoid putting up collateral such as a letter of credit using this product.
A large deductible program can provide a company with cash flow benefits that translates into a competitive advantage over their peers. Communicating the benefits of this program will demonstrate an expertise and secure a long term partnership with your client. For more information on PMA’s insurance services, please contact your broker or visit our website at https://www.pmacompanies.com/insurance.html.
Jeanne Consiglio is the Territory Marketing Manager for the New England insurance operations of PMA Companies. With more than 25 years of experience in the commercial insurance field, she is responsible for expanding PMA's presence and generating profitable business growth by working closely with brokers and agents throughout New England.