Master Insurance Program vs. Individual Policy

January 19, 2016

Consolidation of an insurance program can be an effective risk management strategy for companies with separate programs for different operations or entities. We often find that in the course of growing their business, many real estate companies and aging services providers have set up different insurance programs for their new operations.

Real estate companies, regardless of portfolio makeup, generally have commonalities: most portfolios consist of a number of different buildings/sites and these various sites typically will not have 100% common ownership.

Similarly, many Aging Services Providers have grown through consolidation of different community sites and have left existing insurance programs intact, resulting in many different insurance programs to administer.

Insurance programs can be structured in a number of different ways, but generally the Insurance program for these organizations will either be a “master” program that rolls-up all the properties and operations under a blanket insurance program, or alternatively a program that insures each under its own set of insurance policies.

While either approach can be successful, a properly constructed “master” program has significant benefits in most situations. Here are six considerations for determining what type of policy is right for your business.

Master Insurance Program Considerations

Limit Adequacy: A master program will often be structured with a “blanket” limit of property insurance or a “loss limit” which is adequate to insure the largest possible loss in any one occurrence. This can have great advantages over a program which simply insures each property individually. Should the individually insured program have a stated valuation that is not sufficient to cover a total loss, an uninsured loss could occur. This is much more likely to happen in a program that insures each property individually than in one with the backstop of a blanket limit or very high loss limit. Similarly, the liability limits can be purchased for the entire organization with one or two insurance companies versus multiple carriers. Endorsements can be added to the policy so that the limits apply to each property or operation separately – removing any concern of losses from one location eroding limits for the others.
Standardization of Coverage Terms: Let’s assume that an organization to be insured is made up of 20 different limited partnerships that own different properties. If each property were to be insured individually, each line of coverage in each program would need to be negotiated 20 times. The ability to negotiate all the coverages at the same time, for all the entities will likely result in a more solidly constructed insurance program. It is also easier to negotiate desirable coverage enhancements in a large program as opposed to a small one.
Economies of Scale: Similar to the ability to negotiate broadened coverages under a master program, combining all the operations in order to procure insurance for all of them at once will often result in economies of scale savings that could not be achieved when insuring on a one-off basis.
Single Renewal Date: In addition to the administrative burden of continuously being in the midst of an insurance renewal, having several different insurance programs continually being negotiated, bound, and financed leaves significant room for errors to occur during the process. Additionally, payment for a master program can be arranged to smooth cash flows throughout the year.
Acquisition/Divestiture Ease: A master insurance program is the most flexible mechanism for adding and deleting properties or operations throughout the year; typically, as part of such a program there is a pre-set rate for adding and subtracting exposures. This is particularly useful for real estate companies since it removes one of the “moving parts” from a transaction.
Ease of Allocation: Insurance budgeting and allocation can be significantly easier in a master program where the insurance spent for each operation or entity is known at the beginning of the policy period and specifically allocated at that point. Similarly, budgeting is simplified since the process takes place once a year on an entire portfolio basis instead of property-by-property.

Conclusion
There is no one-size-fits-all solution for structuring an insurance program. Different situations call for different approaches. Knowing this, you should always loop in your insurance broker when making these kinds of decisions because he or she will help you determine what’s best for your business.