Ready to assume risk

Each hauler and environmental services provider approaches insurance differently, but one question remains consistent among all companies: What is the best insurance plan for the best price?

Jimmy Whitehair, a principal at Brentwood, Tennessee-based Commercial Insurance Associates (CIA), and Will Denbo, managing partner at CIA, answered these questions in a session titled “Risk Finance – Take Control of Your Insurance Costs by Different Risk Financing Options in the Waste Space,” a May 25 webinar that was part of the “Today’s Innovations” series produced by Recycling Today Media Group.

“If you want a better premium on your insurance program, you have to look at yourself in the mirror, and you have to take control without looking externally to the insurance world to get a better rate or a better premium,” Whitehair said.

While many companies consider insurance to be the main way they control risk, Whitehair said insurance is simply a way to transfer risk. He said all companies must choose from one of three risk financing options.

1. Transfer the risk. By buying an insurance policy, a hauler transfers its entire risk to the insurance company for a premium. The insurance company can charge the hauler to transfer that risk.
2. Eliminate the risk. While this is a possibility for some industries, Whitehair said it’s not feasible for waste haulers. “You’re not going to eliminate [risk] and just shut the door and lock it. That’s not realistic in our world that we live in,” he said.
3. Retain the risk. Whitehair said this option is “the most advantageous” and cost-effective way for waste haulers to finance risk. With this option, the waste hauler controls its own risk, retaining it instead of transferring it to an insurance company that will charge premiums.

Transferring risk to an insurance company is also known as guaranteed-cost insurance. With this risk financing option, companies pay a set premium to the insurance company.

“For that premium, in return, it doesn’t matter if you have $5 worth of claims or … $10 million worth of claims. You have transferred the entire risk to the insurance company for, in return, providing you the insurance on a guaranteed-cost basis,” Whitehair explained during the webinar.

Guaranteed-cost insurance is available to just about any operator in the market, he added.

However, Whitehair said, this is the most expensive form of insurance. When a company transfers all its risk to an insurance company, there’s a chance the insurance company could lose money if the insured company has many claims. Alternatively, this option can be very costly for the insured and make money for the insurance company if the hauler did not have many claims.

As a result, a hauler could benefit from retaining some or all its risk rather than transferring the risk in a guaranteed-cost insurance program. Whitehair said haulers can choose from several types of insurance programs that allow them to retain more risk and ultimately save on insurance costs.

Deductible programs

Deductible programs are one step away from guaranteed-cost programs, but this form of program requires a little more risk retention on the part of the hauler.

Before applying for a deductible program, insurance companies vet haulers to make sure they can assume more risk. Whitehair said slightly fewer insurance companies will be willing to work with haulers on a deductible program compared with guaranteed-cost programs because of the increased risk retention.

“They have to make sure that you are financially capable of retaining the desired deductible that you feel most comfortable taking,” Whitehair said of the deductible program. “For example, if you go to that $100 per occurrence deductible, then what they’re going to want you to do is you’re going to have to post collateral to make sure that you are good for any claims under the deductible. If you go to a deductible program, you’re going to have to have a financial element of underwriting and make sure that you qualify for it.”

When CIA works with new clients, Whitehair said the company asks owners tough questions, such as whether the prospective client feels 100 percent confident in its ability to control risk. “Only then will we offer an opportunity to go to a deductible program,” he added.

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Incurred retrospective rating Insurance programs

Another program just one step away from guaranteed-cost programs is an incurred retrospective rating program. Whitehair said these programs are similar to deductible programs in that companies retain a claim limit amount. He said the main difference with incurred retrospective rating programs is that the insurance company does not require collateral because the hauler prefunds the anticipated claims in an annual premium.

“Your premiums would look exactly like guaranteed costs,” Whitehair said. “They would be 12 installments over the policy period. A small percentage of your premium would be sunk costs for the insurance company, meaning you have to have underwriting, profit, claims [and] loss control. But from the prefunding amount of claims in those premiums, the actuaries from the insurance company have estimated what your anticipated losses will be over the years.”

He added that this program “works really, really well” for companies in the waste industry because the program does not require collateral.

“Waste haulers really like to use their collateral for things like equipment, trucks, [and] transfer stations,” Whitehair said.

Denbo added that retrospective programs simply enable companies to prefund their losses. “If you outperform the losses, you get a dividend back six months after the policy period. You could actually use the money that you get back in a dividend to pay towards next year’s premiums. More importantly, it doesn’t bind you to an insurance company.”

Captive programs and self-insurance

Captive programs are two steps away from guaranteed-cost programs, with haulers retaining more risk and essentially becoming the insurance company.

“The captive world allows you as the hauler to actually go into a group of different people and create your own insurance company to provide insurance for you. You can be your own captain,” Whitehair said.

Deductible and incurred retrospective rating programs feature an element of fixed cost as well as underwriting profit. With captive programs, profit becomes the hauler’s asset.

“If you’re in a group, you might be in it with 500 different types of companies,” he said. “You have to have a financial guarantee—meaning your financials have to pass underwriting—you would have to have an occurrence limit on the individual as well as the group as a whole. But over time, call it five years, you [can] generate a big nest egg depending on your performance and become the insurance company.”

Finally, with self-insurance, a company retains all its risk. However, Whitehair said, this isn’t a viable option for most companies in the waste and recycling industry.

“To be truly self-insured, for example, on workers’ compensation, you have to be dealing with a substantial amount of premium,” he said. “This is not common with a majority of the haulers and environmental services companies.”

Very large companies—such as GFL Environmental Inc. or Republic Services—would be much more likely to qualify for self-insurance than smaller haulers. Whitehair said self-insurance requires approval from the state the company operates in and a higher level of financial assurance.

“Think outside the box and try to do some different things to really gain some value.” – Jimmy Whitehair, principal, Commercial Insurance Associates

Goals for improvement

Retaining risk requires companies to list their goals and strategies to improve and reach that point. Denbo stressed that self-reflection is essential if a company wants to move from transferring risk to retaining it.

“One of the things that we’re really big on is goal orientation,” Denbo said. “If I want to lose 50 pounds, I can’t keep going to McDonald’s and eating hamburgers and drinking every night. I [have] to change my lifestyle. What we try to focus on heavily is being self-reflective, being intentional, putting a list of goals together and trying to achieve those goals to ultimately improve your safety, your loss control and your cultural standpoint so that there’s different and better [insurance] alternatives and that you can bear more risk and drive your costs down.”

He added that companies can’t just “hope” they have a safe work environment; they need to measure their operations’ safety to be confident in that fact. “In order to drive down to a fixed cost and to bear risk, you have to have a certain level of confidence in what you’re doing from an operational standpoint before you can even bear it,” Denbo said.

Regardless of how much risk a hauling company chooses to retain, it needs to make changes to achieve that goal.

“As the old saying goes, ‘If you do what you’ve always done, you’re [going to] get what you always got,’” Whitehair said. “Think outside the box and try to do some different things to really gain some value.”

The author is associate editor for the Recycling Today Media Group and can be reached at msmalley@gie.net.