By Michael J. Bemi
Together in our journey to move “beyond insurance,” we have thus far examined the first two steps in that process: risk identification, analysis and evaluation, as well as risk avoidance.
Now, we undertake the next step in our journey: risk retention.
In this series, we most recently discussed reasons to avoid ministerial undertakings that present too great a risk — those which, if performed, have a significant potential to cause great damage to our church finances, operations, physical and human assets, and reputation. Pursuing such as these is not good stewardship.
Nevertheless, as Christians, we are called to minister to the needs of a hurting world. As such, we are compelled to undertake certain ministries and to assume the risk entailed with those ministries. The questions then become: How much risk should we assume? and How do we assume it?
First, note that risk can be assumed via a deductible or a self-insured retention (SIR). They reflect important differences.
A deductible is an amount of any loss which is retained by the insured, but with the investigation and resolution of the loss remaining the responsibility of the insurer — at the insurer’s expense. The insured receives a premium credit, the size of which is related to the amount of the deductible.
By contrast, when the insured chooses to use an SIR, the insured — at its own expense — becomes responsible for investigating and resolving claims. This assumption of the administrative costs of claims management constitutes one of the elements of the Total Cost of Risk (TCOR) under an SIR. The complete set of TCOR elements includes: the amount of loss retained by the insured, plus the administrative costs of claims management and risk control (to prevent or mitigate losses within the SIR) provided by the insured, plus the cost of insurance coverage limits provided above the SIR. [Additionally, note that modern risk management would include losses that simply are not insurable, but we will ignore that concept for our purposes here.]
How much should you retain? Let’s consider an example.
Light of Faith Christian Church (a fictitious name) is a highly successful, three-year-old, independent congregation with a beloved young pastor who’s very well known for his preaching, and a congregation that is quite wealthy. The church premises are brand-new, modern, and incorporate all the latest protective safeguard elements. The staff is large, well-educated and highly trained.
With all these circumstances in mind — and with the knowledge that the church’s total annual insured losses each year have averaged $26,000 — the church council decides to renew its fourth-year insurance program with a $50,000 deductible per claim / loss. The church’s insurer allowed the church a $100,000 premium reduction overall on the program, in recognition of the church’s $50,000 deductible assumption.
How did this work out for Light of Faith Christian Church?
The church’s losses in the first year of this program included:
1) Its “normal” $26,000 experience
2) A 200-year (i.e., expected to occur once in every 200 years) flood loss totaling $98,000
3) A kitchen fire that resulted in $62,000 of repairs
4) An assistant pastor’s auto accident with another vehicle — for which the church was liable — leading to a total bodily injury and physical damage loss of $95,000.
Calculating for the church’s agreed $50,000 deductible, in that program year, it assumed a grand total of $176,000 of losses, plus the insurance premiums it paid for its coverage above the deductible. In return, it received a $100,000 premium discount. Clearly, this was not very good stewardship.
How can you derive the benefits of retention (reduced premiums, improved claims management and risk control, enhanced cash flow, and greater program control) while avoiding Light of Faith’s experience? First, have your loss expectancy professionally calculated — preferably by an actuary.
Next, negotiate an aggregate cap (or limit) on your deductible / SIR.
Then, always remember to account for TCOR — and never risk a lot for a little!
Michael J. Bemi is president & CEO of The National Catholic Risk Retention Group, Inc. (Lisle, IL) — a recognized leader in risk management. To learn more about available coverage — and to get valuable tools, facts and statistics — visit www.tncrrg.org.