Should dealer groups reduce insurance costs by using discretionary trusts to self-insure?
Dealer groups could reduce their insurance costs by looking at using discretionary trusts to self-insure, according to an Australian insurance broker.
A discretionary trust to self-insure day-to-day claims could be created by a body such as a dealer group, said Jardine Lloyd Thompson general manager, South Australia, Tony Venning.
“By combining a group of businesses such as a dealer group or a franchise operation, it will spread the risk and provide cover for catastrophic events,” he said.
“A business group with total annual insurance premiums of about $1 million a year may, after full actuarial analysis, place $600,000 of this into a discretionary trust, with $400,000 used to insure against catastrophic events.”
Venning said his company hadn’t produced any trusts to date for the financial planning industry, but that didn’t mean they couldn’t be created.
“Most people we talk to about trusts do come up with some solution to leverage their buying power with insurance,” he said.
“Sometimes the trust is the solution or a general policy provides the answer.”
Venning said the trust would cover day-to-day claims and his company would talk to underwriters about providing cover for the unexpected risk.
“We take time to understand the process and risks of a business before talking to underwriters about being involved in the trust,” he said.
“It is very much about finding an alternative solution to a company’s insurance needs.”
The trust has no set period to run and the members contribute to the vehicle to cover insurance costs.
Day-to-day claims such as theft are lodged against the trust.
At the end of the year, depending on the claims history, earnings accumulated by the trust and any surplus are returned to the benefit of the business group.
“If a business group has a good year with lower than expected claims, it shares in the upside, but it is still protected for an out-of-the-ordinary event such as a fire,” Venning said.
“The amount of money placed in the trust is determined by the trustees utilising actuarial modelling, which is built from the business group’s prior history of claims and the average payout each year.”
Trusts can be wound up and surpluses paid back to members, but Venning said remaining members often rollover their payouts to the new trust vehicle.
He said with the recent natural disasters in Australia and falling investment markets, premiums for insurance will rise.
“In normal times, insurers use returns from investments to help pay claims and keep premiums down,” Venning said.
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