Published in Dealer Magazine, February, 2008
There is nothing magical about holding on to some of the risk yourself; it’s nothing more than a numbers game or a Vegas bet.
The dealership insurance market is becoming more vigorous each week. We are seeing a few more insurers quoting dealership insurance. Even more interesting, some of the smaller programs are jumping back to life. A number of the dealer insurance programs have changed management and with new direction, may begin to make bigger inroads that they had previously. More competition is always to the dealer’s benefit.
A couple of years ago I wrote an article that appeared in Dealer Magazine suggesting that the insurance industry should offer more large deductible programs in order to both share risk and lower dealer insurance cost by putting the dealer in control of success of their insurance programs. To date there are still few companies that offer large deductible or retention programs. However, word on the street is that more companies will be offering these types of programs in the very near future. So, it’s probably a good time to take a look at the pros and cons of retentions and large deductibles.
For starters, there is nothing magical about holding on to some of the risk yourself. As you will see it’s nothing more than a numbers game or a Vegas bet, if you will. The question that must be answered is “are you receiving enough of a reduction in your premium to warrant the additional risk you are taking on?” These programs come in basically three types, large deductibles, retention plans and retro plans. Since retro plans seem to be less prevalent and often limited to Worker’s Compensation, this article will focus on the other two.
A large deductible plan is what it sounds like. You will pay or absorb a large deductible of $2,500 to $10,000 or more for each and every claim. In some cases the insurer may put a cap on the amount of total deductibles you will pay in a policy year. When reviewing such a bid, it is important to take a hard and realistic look at your losses. If you have had a high frequency of losses, don’t assume the trend will improve unless you have taken aggressive steps to reverse the trend. For dealers who already operate under a large deductible plan, don’t assume it will always be the most cost effective way to go. Getting bids from competing fixed cost programs is always advisable, especially in the improving insurance environment which we now find ourselves. Needless to say, the price of the fixed cost program should be compared to your large deductible plan premium plus the funds you have paid in deductible costs.
Retention plans are similar but slightly more complicated. They also may be better for the smaller dealer or dealer group that is uncomfortable with the more open ended risks associated with large deductibles. In a retention program, you will have deductible similar to that of a fixed price program. You will pay the deductible then you will fund the rest of the claim up to the aggregate retention limit. You could pay out the entire retention limit for one claim. Once the retention limit is met, the plan acts just like a fixed cost plan. As an example, let’s say you have a retention program with a $50,000 retention limit plus a $1,000 physical damage deductible. There is an auto accident in which your driver is responsible. The damage to each car is $10,000 and the other driver has $60,000 of medical bills, legal fees, etc. You would first pay the $1,000 deductible and it does not count against your retention. Then you would pay the remaining $9,000 for your car, $10,000 for the other car plus $31,000 of the medical bills. You insurer, would pay the balance of $29,000. Any other claims during the policy period would still have the normal deductibles applied but the insurer would pay the rest. Smaller claims work the same way until they add up to the retention limit of $50,000 in addition to the standard deductible.
It can be confusing to compare a retention program to a fixed cost program. Let’s assume you receive two bids, one is a fixed cost program with a premium of $200,000 and the other is a retention program with a $50,000 retention and a premium of $170,000. Simply put, this means that if you have no losses you will pay $170,000, but in addition you will pay for your losses up to $50,000. You could pay as much as $220,000 if you have losses during the year. At this point you are betting a $30,000 possible gain against a possible $20,000 loss when compared to the fixed cost plan. You need to look carefully at your losses. If you average $30,000 a year, which is still quite good for an account this size, then you’re back up to $200,000 ($170,000 premium plus $30,000 of losses) so you would have to wonder if this is a good deal for you? On the other hand, if your losses are much lower, maybe it’s worth the bet. All the same principals apply when looking at a large deductible plan. The difference between the retention and large deductible in this scenario is that the retention can be consumed in one claim where with a large deductible it will take a number of claims to reach the aggregate. The large deductible aggregate however may be much higher than the retention limit. Both retention and large deductible plans come with significant risks requiring you to take a realistic appraisal of your loss history to make the best decision.
The bottom line is that these loss sensitive plans have their place but must be scrutinized to make sure they are a good fit for your dealership; taking into account your willingness to accept risk and loss history. Don’t assume that because you have agreed to accept some of your insurable risk that your loss sensitive insurance plan is the most cost effective, especially in an improving insurance market. Bidding your coverage each year is the only way to be certain your dealership has best coverage at the lowest possible cost, especially in this improving market.
