Retailers, food and beverage companies using alternative solutions to manage risk

Challenging insurance cycles put added pressure on organizations, especially ones that typically operate on thin margins, such as retailers, restaurants, and food and beverage companies. To manage insurance premium costs and address capacity challenges, an increasing number of businesses are supplementing their traditional insurance options with innovative ways to finance risks.

Alternative risk transfer (ART) solutions — such as structured or integrated programs and captive entities and captive structures — allow organizations to supplement traditional insurance coverage with additional programs that align with their unique risk profiles. These programs are typically more flexible, creative, and customized than traditional insurance, and can provide supplemental coverage to help organizations protect their assets and manage risks more efficiently, often in a more cost-effective way when taking a long-term view.

Aside from reducing potential coverage gaps, targeted solutions can help organizations achieve more certainty about premium spending over the long term. This approach can be particularly valuable for companies facing large or complex risks that may exceed the capacity available from traditional insurers.

Retailers, restaurants, and food and beverage companies are increasingly using alternative solutions to counter the impacts of challenging insurance market conditions, especially in difficult lines of coverage. For example, considering their significant real estate footprint, many of these companies have long contended with higher property insurance rates, especially in areas that are prone to natural disasters, such as hurricanes, earthquakes, or wildfires.

Innovative solutions for long-term risk management

Whether they face higher premium rates and more difficult terms and conditions, or their risks are difficult to insure through traditional coverage, retailers, restaurants, and food and beverage companies are seeking sustainable ways to manage their exposures. As they look for strategies that are feasible over the long term, more risk managers are showing interest in:

Captives are insurance vehicles, typically owned by a parent organization, that are licensed to do business in a captive domicile. A captive offers a formalized mechanism for self-insuring specific risks that an organization — typically the parent company — wants to retain. In addition to single parent captives, there exist simpler and generally less expensive options for companies, such as rent-a-cell or cell captive structures.

A food and beverage company faced large retentions on its casualty program, coupled with outstanding liabilities. Following a captive feasibility study, the organization formed a wholly owned captive in its home state to provide coverage for traditional casualty risks, including workers’ compensation, general liability, and auto liability. The organization has seen significant cost savings and is now considering adding other lines of coverage into its captive.

Structured risk programs are tailored products that include a portion of self-insurance and are typically purchased on a multiyear basis.

A retailer with stores around the country was struggling to obtain adequate auto liability coverage for an excess layer of their program through the traditional insurance market, mainly due to decreased market capacity. Rather than retain the risk, the organization’s senior leaders decided to explore alternative risk transfer options to find cost-effective critical capacity, ultimately securing an insurance backstop. And if losses remained below a designated threshold, the retailer could receive a return of premium paid at the end of the term.

Integrated risk programs combine different coverages, aggregated within a single multiyear program that share at least one limit of liability.

A restaurant group’s premiums across multiple lines of insurance were increasing every year, despite minimal losses. A review of recent years’ insurance purchasing uncovered inefficient practices. The restaurant’s leadership decided to explore alternative solutions and decided on an integrated risk program to consolidate the different lines of coverage into one policy with an aggregate limit. The organization retained a certain amount of risk, and the insurer provided coverage for the remainder up to the policy’s limits, leading to significantly lower premiums.

ART solutions can provide customized risk financing mechanisms to address risks that are typically expensive to cover and hard-to-place, strengthening an organization’s broader risk management strategy.

Using ART solutions can allow businesses to diversify their risk finance strategy beyond traditional insurance. Aside from helping companies potentially mitigate the impact of catastrophic events, ART solutions may allow for greater stability in cost and coverage terms, offering companies a measure of protection from adverse market conditions like rate increases, inflation, and capacity reductions, particularly in the most volatile layers of insurance programs.

Understanding risk appetite and capacity

For businesses interested in employing an alternative solution, the first step is typically to understand their risk appetite and capacity: How much risk are they able to tolerate before it becomes detrimental to their organization?

It is also critical to determine the sources of funding that are currently available to pay for unexpected losses and how to recover in the most efficient and effective manner. This requires a data-driven approach and a thorough understanding of their risks and how they could impact financial and business objectives. Approaches include using key performance indicators for the organization and examining how peers are addressing challenges that could impact these KPIs.

Once they have defined their risk appetite, organizations can model their potential losses and identify areas of vulnerability and gain deeper insights into the financial impact of various risks. This information can be used to delve into the risk management strategies that would be most effective for their specific challenges. At this stage, it is also critical to understand what is feasible in the marketplace and build a bespoke alternative program that may bring together different solutions and lines of coverage.

Exploring alternative risk transfer solutions to complement traditional coverage

Most organizations that invest in alternative solutions do so to supplement traditional coverage or fill gaps within their existing programs. Difficult market cycles tend to fuel increased interest in ART solutions as organizations seek to more efficiently manage their finances and ensure they have sufficient coverage.

ART solutions can offer significant benefits, including cost savings and more flexibility. However, they typically require a significant upfront investment, underscoring the importance for organizations to evaluate the long-term financial implications. For example, it’s important to consider set-up costs, especially if there are plans to establish a single-parent captive, and ongoing expenses.

Note also that alternative solutions typically involve organizations taking on more risk, requiring careful planning and analysis to determine whether this aligns with business objectives and allowing leadership to have clear insights before signing off.

It is critical for senior leaders to work with their insurance advisor to assess the upfront costs and potential long-term savings or returns associated with these solutions, compared with a similar level of traditional coverage, where available. A thorough cost-benefit analysis is needed to determine whether the opportunities outweigh the initial and ongoing expenses, and if these costs align with your organization’s financial goals.

Alternative solutions are not intended to completely replace traditional coverage. Many organizations using ART solutions have a combination of the two, allowing them to build a more comprehensive and tailored program that meets their specific needs and risk profiles.

Cross-team collaboration key to successful alternative risk transfer implementation

The successful implementation of an ART program requires cross-organization collaboration, including risk management, finance, tax, treasury, and legal departments. This collaboration is required from the early stages, when organizations are working to understand their risk appetite and fine-tuning models to ensure they apply to their specific requirements.

And once a decision has been taken to invest in an alternative risk transfer program, multiple stakeholders need to be involved to ensure that the organization takes a comprehensive and integrated approach to understanding the most effective solutions and implements them effectively. Thorough collaboration allows teams to leverage the expertise and insights of each specialist and develop a holistic risk management strategy that incorporates traditional insurance and alternative solutions.

In today’s challenging risk environment, organizations must navigate evolving and emerging challenges and make sure their business has the structures in place to withstand a potential catastrophic event. Managing risks effectively requires an ongoing effort that focuses on regularly reviewing all risks, reassessing the organization’s risk appetite, and evaluating the effectiveness of the existing risk transfer program, making the needed adjustments designed to achieve appropriate protection.

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Article

Retailers, food and beverage companies using alternative solutions to manage risk

Innovative solutions for long-term risk management

Understanding risk appetite and capacity

Exploring alternative risk transfer solutions to complement traditional coverage

Cross-team collaboration key to successful alternative risk transfer implementation

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Retailers, food and beverage companies using alternative solutions to manage risk

Innovative solutions for long-term risk management

Understanding risk appetite and capacity

Exploring alternative risk transfer solutions to complement traditional coverage

Cross-team collaboration key to successful alternative risk transfer implementation

Related insights

New food & beverage study uncovers safety best practices

Restaurant trends analysis

3 major supply chain risks retail, food and beverage companies must navigate

Responding to demand and realizing growth in a complex world