Large Deductible Plans as an Alternative Risk Management Technique

In these plans, the organization has a fully insured insurance plan in place. As part of that plan there is a large deductible. The business owner may be required to either reimburse the carrier up to the deductible limit or actually pay the claims directly up to the deductible limit. Most of these large deductible plans have stop-loss limits for each occurrence and for an annual aggregate amount.

Unlike a self-insured plan whereby the organization takes on and retains all the risk, a large deductible plan has a maximum amount that could possibly be owed and it is known in advance for the company. That makes it more palatable for the insured to be able to provide internal funding to come up with the per-occurrence and per-aggregate large deductible exposure that they have signed up for.

In the large deductible plan the shock losses or catastrophic exposures are fully insured except for the large deductible. There are obvious cost savings by going to a larger deductible. In the larger deductible plan the insured does not have to provide their own claims administration, lost control services, etc… The insurance carrier still provides all those services that are included in the premium. The insured has skin in the game with a larger deductible.

What are the issues that an organization needs to sort out in order to decide to go to a large deductible plan? The overriding decision criterion is mostly mathematical. Having actuarial numbers to crunch help make sure it is feasible is tantamount in order to have success in this strategy.

• Having a reliable source of historical claims data and industry-specific claims data to analyze the frequency and severity of losses in this large deductible area is at the cornerstone of the decision-making process.

• The second component of deciding whether to jump into the large deductible Arena is to make sure that the organization has the ability to fund large deductible payments when required due to claims or losses.

Unlike self-insured plans, large deductible plans have tax advantages. The premiums that are paid throughout the year and all deductible payments and/or reimbursements that are made by the insured to the insurance carrier are also tax deductible in the year they are paid. An organization that participates in a large deductible plan is a lot safer and has more options in exiting the plan then choosing a self-insured plan. Normally at the renewal, the insured can lower the deductible plan and thus is only exposed to the large deductible plan for a 12 month period of time, if they so choose. The self-insured plans are not so easy to exit from the insured standpoint in that there tends to be some delayed cost over time and the liability exposure for the insured can linger on for an indefinite time period. The business owners who have accurate and reliable historical claims data for both their company and the industry they are in can usually with great certainty predict the outcome of going to a large deductible plan. Basically what one would do is to crunch all the numbers looking backwards on the historical data has if the organization had a large deductible plan in place. You can then compare the cost savings on the insurance premiums from going to a large deductible plan versus the amount that was historically paid out if the deductible had been larger. Doing a trial run analysis will probably make the decision clearer whether or not this is for you and your company.

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