Alternative Risk Financing – What Is It and Why So Suddenly Popular?
The subject of alternative risk financing causes many yawns and closed eyes at meetings and conferences. Let us cover it today as many new clients have decided to pursue “not your usual Workers Comp policy.”
Alternative risk financing looks like a concept out of a risk manual. During the pandemic, from J&L’s corner of the insurance market, more companies decided to step outside the usual Workers Comp coverages.
To see a listing of articles related to this subject click on this link for PEOs and this link for Captives. I used to write many articles a month on these two subjects. Successful situations caused me to take a great interest in companies that decided to “step outside the box.”
Alternative Risk Financing Definition
A great layperson’s definition from me is –
Anytime that a company or individual decides to take on more of a portion of a risk than with the usual insurance policy. If you increase your car or home insurance deductible, you are practicing alternative risk financing. You will be taking on more of the risk by coming out of your pocket if you have a home or auto claim.
Self-insurance remains one of the easiest methods in all of alternative risk financing.
With so much analytical software and experts in one area of insurance, this area of financing has become even more popular lately in Workers Compensation.
Two Stalwarts of Alternative Risk Financing
Two that I wanted to mention today are two old-school alternative risk financing techniques: Professional Employment Organizations (PEOs) and Captives. I have seen first-hand successful PEOs and captives. Workers Comp alternative risk financing was recently bolstered by the access to so much data analysis as IT or AI advances quickly.
How do I know these two stalwarts’ rise in popularity? Everyone started discussing them after the first of the year and many potential clients have contacted J&L on cutting comp costs.
PEOs
PEOs became very popular in 2010 and after. The market became saturated with so many PEO providers. Some of them possessed no scruples. I turned down many expert witness assignments where PEOs were in trouble and were attempting to get out of the hole they dug for themselves.
With the tightening of state regulations on PEOs most of the undesirable companies are now long gone. The main idea here remains that anything that sounds too good to be true – likely is. Gut feelings work great in this area.
Captives
The IRS decided to (and still is) pursue 831(b) micro captives.
After assisting companies with winding down and eliminating/withdrawing micro-captives. I would have thought the interest in all captives would wither.
For larger companies, captives may be a great way to take on some risk without becoming self-insured and putting all the risk on the line.
Bottom Line on Alternative Risk Financing
I will be talking with more alternative risk financing practitioners over the next few weeks. I will check back in with the new article once I see what is occurring in the markets and not just Captives or PEOs.
The main caveat comes from not singing off on something that your gut feeling is telling you otherwise.
