Own It or Rent It?

By Tim Finster

This is not a phrase normally associated with the purchase of insurance. Usually it’s reserved for discussions about real estate, cars or office equipment. But it’s possible with insurance too. The major corporations have done it for many years.

Who was the first? I don’t know, but it might have been Kaiser. Henry J. Kaiser was the founder of the Kaiser Industrial Complex. In 1939, he opened a cement plant in Cupertino, CA. A creek ran through his facility, Permanente Creek. Henry decided to do something to get control of his employee’s health care expenses. He created a program to better serve the health care needs of his employees, reducing his annual costs and providing better health care for his people. It was a cultural shift for his employees that Kaiser Permanente still espouses today. He concluded that for him, owning, and being in control, was better than renting. He called his company Kaiser Permanente. The year was 1942.

Although I wasn’t personally there, I’m betting that Mr. Kaiser discovered redundancies in the delivery of health care and the value of preventative medicine, which helps create a healthier workforce. In the property/casualty world we call that preventive medicine Risk Management.

In its simplest form, insurance is just renting (paying a premium) someone else’s balance sheet so you can write a check from their checkbook rather than yours when a catastrophe happens (coverage). Businesses that have a lot of claims, including some large claims, should rent. Businesses that have low claims frequency and no severe claims should consider owning.

Businesses that rent someone else’s balance sheet never get anything back from the company that took his rent unless they have claims. A more efficient way to get money back is to share that balance sheet risk with the company, taking on some of the claims liability in return for being able to keep some of the rent for themselves. That’s called alternative funding strategies.

Companies that have low claims have a reason to think they might get something back. Companies that have frequent claims activity should rent, period. That’s called full risk transfer.

How would someone go about exploring “owning” their own insurance company? The answer is consultation. Consult with someone that can demonstrate experience and expertise in managing risk for alternatively funded businesses. Evaluate all of your enterprise’s risk exposures and risk management procedures. Decide which are worth taking “the bet” on, and insure the rest. Or potentially, take some of the risk on an exposure at the smaller end of the scale and insure everything else. That’s called partially self insured.

Take the bet on the small stuff and insure the big stuff. You’ll be surprised at the result. It answers the question many of you have asked. “How much money am I leaving on the table?’ I’m betting at least 15% if you’re in control. More if you’re claims-free.