As agriculture enterprises grow in scale, complexity, and financial strength, traditional insurance coverage may no longer be the most efficient or strategic way to manage risk.
During the third installment of our Risk Intelligence Webinar Series, insurance experts Brad Willadsen and RP Lopez of Gallagher Insurance help producers answer the question: Is the way we currently manage risk the most effective approach?
This article summarizes key lessons from the webinar, including replacement-cost challenges, business interruption coverage, deductible strategies, and risk management practices that can help protect your farm or ranch.
Key takeaways
Rising premiums and coverage restrictions may signal it's time to rethink your insurance strategy.
Risk management exists on a spectrum, from traditional insurance to greater self-insurance and ownership.
Alternative risk programs can provide more control, transparency, and customization.
Large and diversified operations often benefit from solutions that go beyond a single insurance carrier.
The right structure depends on your operation's risk tolerance, financial strength, and long-term goals.
The question behind alternative risk
Traditional insurance works well for many operations. But as operations grow in scale, complexity, or financial strength, standard risk management strategies may not be efficient.
Larger, more sophisticated operations may need to reevaluate how much risk they transfer to insurers versus how much they retain and actively manage themselves.
Takeaways: Operations rarely lack insurance. Instead, they may lack the flexibility, control, or alignment of premiums paid versus their operation's actual risk profile. As businesses mature and outgrow standardized insurance solutions, alternative approaches to risk become more important.
What are alternative risk strategies?
When a producer needs to align existing risk structures to the realities of business today, alternative risk strategies may come into play.
This isn't about abandoning insurance altogether. Rather, this shift typically follows a continuum, allowing producers to incrementally tailor options to their comfort level, financial resources, and management capabilities.
At one end is traditional, guaranteed-cost insurance, characterized by low deductibles and broad risk transfer to an insurance carrier. Self-insurance sits at the opposite end, and in between are choices that include retaining more risk through larger deductibles, self-insured retentions, or alternative financing mechanisms.
Takeaways: Risk appetite, resources, financial strength, and administrative capacity will determine the level of control your operation is ready to take on. While customization and control increase the further an operation moves toward self-insurance, this shift also requires strong financial oversight, governance, and professional support.
When to move beyond traditional insurance
No one factor signals that it is time to rethink your risk management approach. But in general, the need to think differently arises when operations experience significant growth, expand to multiple locations, increase their workforce, and add complex business activities. These changes can affect the way standard insurance carriers look at an operation's risk profile.
Diversification can also create challenges. It is not uncommon for agricultural operations to diversify into adjacent enterprises, such as packing houses, or community-based businesses, such as employee housing, hotels, gas stations, and restaurants. From a business perspective, diversification may make sense. From an insurance perspective, it can create complexity for standard insurance carriers and make it more difficult to find one willing to carry risk associated with nontraditional enterprises.
Takeaways: It may be time to reevaluate how you manage risk if:
Premiums continue to go up, even absent any claims
Standard insurance carriers begin limiting your coverage
Deductibles are increasing
You want more control over your insurance spend from one year to the next
What layered property programs actually do
Large or diversified operations that outgrow the risk appetite or capacity of a single traditional carrier often are forced to buy multiple policies or face coverage restrictions and/or higher carrier-imposed deductibles.
This is when layered or shared property programs come into play. Rather than one carrier holding the full risk of a large or diversified operation, multiple carriers take smaller portions of risk.
These programs often include carriers based in London, Bermuda, and Atlanta, allowing risk to be spread globally. The benefits to operations can include greater flexibility, with coverage built around the operation's needs rather than relying on a single carrier's pricing decisions or underwriting decisions.
Takeaways: Customization can be powerful, but only if the operation can provide credible information and maintain strong risk management practices.
Large operations considering alternative structures need to be prepared with:
Accurate valuations
Business income and extra expense analysis
Engineering information
Loss history
Risk management practices
Clean financials
Clear advisor coordination
Why captives are about long-term ownership
Once operations move beyond traditional insurance and larger deductible programs, the conversation often shifts to the captive world. Group captives, segregated-cell captives, and single-parent captives each offer a way for organizations to assume more responsibility for risk while gaining greater influence over insurance costs, coverage, and long-term financial results.
Producers shouldn't expect day-one premium savings with captives and alternative structures. Captives are tools for building longer-term ownership, control, and equity.
Benefits may include investment income, equity accumulation, and more control over how risk dollars are used. But captives may also require upfront funding, collateral, or set payment structures.
Takeaways: Evaluate alternative risk structures based on how they affect total cost of risk, volatility, control, and long-term value.
What holds operators back
Alternative insurance structures raise a number of concerns, including complexity, collateral requirements, risk sharing, financial readiness, business flexibility, perceived instability, and the added responsibility that comes with retaining more risk. Many are valid but not necessarily insurmountable.
Some assert that the layered market is less stable. In fact, layered or shared placements can create more stability by spreading risk across markets.
Others might be held back by misconception that only operations that experience losses use alternatives, or they don't like the idea of shared risk. Operations use alternatives because they are ready to take more ownership of their risk program. And shared risk isn't unique to alternatives. Producers share risk with standard policies—they just don't see the mechanics of it.
Takeaways: There are many misconceptions about alternative insurance programs. If traditional insurance isn't working for your operation, talk to an expert to better understand what alternative programs can and can't do for it.
What it takes to do this right
Alternative insurance programs are not do-it-yourself decisions. Getting the right sequencing and structure requires a strong team of advisers.
Brokers will help you find the right program for your needs. You also should seek advisers in the areas of:
Taxes
Accounting
Law
Investment
Risk management
Takeaways: One structural decision can affect insurance pricing, collateral, claims handling, excess coverage, and future flexibility. You need a strong advisory team to avoid mistakes.
Questions to ask before exploring a different insurance structure
Has our operation outgrown a standard insurance placement?
Are premiums increasing even though our loss history is strong?
Are carriers limiting coverage or forcing larger deductibles?
Are we diversified in ways that make standard insurance harder to place?
Do we have accurate valuations, business income calculations, and engineering information?
Do we have audited financials and the financial strength to retain more risk?
Would a higher deductible, or captive or layered program improve our total cost of risk?
Are we prepared for collateral, upfront funding, or annual payment requirements?
Do our current advisers have experience with alternative risk structures?
What would we need to understand before changing how our risk is financed?
For large ag operations, alternative risk is not about avoiding insurance. It is about deciding whether more control, transparency, and long-term value are worth the added financial and operational discipline.
If you want a deeper understanding of alternative insurance programs and when to consider them, watch the full webinar recording of “Alternative Risk Strategies."
