Group purchasing, group protection - risk-purchasing groups cut costs of liability insurance for member companies - Small Business Financial Advisor: Insurance

Nation's Business, Sept, 1995 by John S. DeMott

In more ways than one, small businesses are finding that they can work collectively to protect themselves with liability insurance, thus lowering expenses on everything from introducing new products to handling hazardous materials like dynamite.

One way is through a risk-retention group. Begun in the 1980s as a defense against then-escalating insurance premiums, these groups allow businesses in the same industry, like plastics or chemicals, to cut insurance costs by effectively chartering "mini-insurance companies" to self-insure against liability claims. Today, there are about 75 risk-retention groups in the U.S.

But an even faster-growing variant of the risk-retention group is the risk-purchasing group. Under it, similar businesses are grouped together--usually by insurers, agents, or business associations--not to self-insure but to buy liability coverage collectively.

In the first six months of 1995 alone, 46 risk-purchasing groups were formed, nearly double the 26 for the same period last year. The national total is now 492.

There is a reason, of course, says Karen Cutts, a lawyer and editor of a Pasadena, Calif., newsletter called The Risk Retention Reporter and author of a new book, A Practical Guide to Risk Purchasing Groups. "Risk-purchasing groups enable small businesses to have economies of scale in buying insurance and to tailor the insurance to their needs," she says.

Curiously, one reason for the rapid growth has to do not with high insurance premiums but with persistently low ones since the end of the 1980s. This has left many property and casualty insurance carriers competing for profitable ways to sell insurance to small businesses.

By forming or targeting risk-purchasing groups, the insurance companies get the benefit of simultaneously selling to many small businesses, reaping what Cutts calls a "critical mass" of premiums upon which the insurance companies can make a profit.

The businesses, in turn, get group leverage with carriers to negotiate good prices and, more to the point, obtain what Cutts calls "relevant" insurance coverage.

One example is the Propane Gas Purchasing Group of Houston. The group, made up of about 1,600 retail propane dealers throughout the U.S., gets its liability coverage from Houston's Ranger Insurance, a longtime writer of propanedealer insurance.

After inspecting the dealer for adherence to safety procedures, Ranger sets a company's premium according to the volume of propane the firm sells. Premiums average about 15 percent below those for dealers who buy coverage individually, which is sometimes tough to do.

For more information about risk-purchasing groups and whether any exist or can be formed in your industry, contact your insurance agent or broker, or call Judy Harrington, executive director of the National Risk Retention Association, at 1-800-999-4505.