Just Who Should Think About Forming a Risk Financing Facility?

A day does not go by when I do not talk about the requirements for putting together a risk financing facility (RFF).  Oddly enough, while I have written about it in pieces across several platforms, I haven’t talked about it comprehensively in a single place.  That is the topic of this piece: who is a truly viable RFF candidate?

Let’s start with attitude – that is, what is the attitude of the parent company’s management towards risk management?  It is here that I break down insurance purchasers into two categories: the perfunctory purchaser and the knowledgeable purchaser.

The perfunctory purchaser treats the insurance purchase like the three-year-old views eating vegetables: they will do it, but there is a large amount of reluctance on their part.  Here is the way I describe the process in my book Captive Insurance in Plain English (You can request a FREE copy on our homepage):

Insurance is a grudge purchase. No one wants to buy it, but people know they need it. So once a year they call an insurance agent, get a quote, buy and receive the policy, and then promptly place it in the lower right-hand drawer of their desk, never to be seen again (until they need to file a claim).

This describes about 90% of all insurance purchases.  These companies are extremely poor candidates for RFFs.  They simply do not have the right attitude to start and then maintain a self-funding program.  They will not implement risk mitigation strategies; they will not want to attend a yearly meetings; they will not want to file claims.  In short, they will not want to do anything required to maintain an insurance program.

What we really want are “knowledgeable purchasers.” These are people who had what I call an “aha moment” where they have suddenly become aware of the idea of risk and its management.  Four scenarios typically create or cause this attitude.

1. The insured tried to file a claim with his insurer and had it denied
2. The insured filed a claim with his insurer but had a very difficult time resolving it.
   
3. The insured tried to find insurance but couldn’t find it or could only find very expensive coverage
4. The insured as achieved a great deal financially and suddenly realized they could lose it due to an entirely fortuitous event.
   

These people will do what is required to form and run an insurance company.  These are the people you want. 

Second, what size company should do this?  Here is an area where reasonable minds will differ.  However, I like the company to have a minimum size and “financial girth” because at that level and higher, the company can put together a pure captive, or, a captive that doesn’t need to participate in a risk pool.  The minimum is usually about $10 million in gross revenue with 20-25 employees.  It’s possible that the amount could be smaller, but it becomes progressively more difficult.

So, there you have it: a summary of the requirements of a real RFF candidate.  I should stress that the attitude is – by far – the key issue.  If they don’t want to do, walk away.