Franchising and self-insurance: a "risk appetite" strategy for SMEs without overpaying

Franchising and self-insurance: a "risk appetite" strategy for SMEs without overpaying

Introduction

For an SME in French-speaking Switzerland, determining the right deductible level in an insurance policy or opting for a form of self-insurance is not simply a matter of reducing premiums. It involves a structured trade-off related to their financial capacity , risk appetite , and operating model . This choice influences both the overall cost of insurance, financial resilience in the face of a claim, and the quality of risk management. By the end of this reading, you will be able to decide when to adjust a deductible, when to consider a level of self-insurance, and how to document these decisions for your governance.

1. Fundamental concepts for decision-making

1.1 What is a franchise?

The deductible is the portion of the costs of a claim that the insured must pay before the insurance company intervenes. In any standard contract, this mechanism aims to share the risk between the insured and the insurer in order to reduce minor claims and control premiums.

Key principles to remember:

• The deductible generally reduces the annual premium : the higher it is, the lower the premium is often, all other things being equal.

• It applies to all types of insurance (transport, professional liability, property damage).

• The amount and conditions of application are defined in the contract.

1.2 Self-insurance vs. traditional deductible

The term self-insurance refers to a risk retention strategy where the company assumes a more significant share of the losses rather than transferring that risk to an insurer.

Key difference:

• Traditional deductible : the insurance covers costs beyond the defined deductible, with shared claims management.

• Self-insurance (formal retention) : the company itself finances a pool or reserve to cover all or part of the claims without immediate recourse to an external insurer.

For many SMEs, self-insurance initially takes the form of a high deductible or the voluntary acceptance of minor losses without reporting them to the insurer.

1.3 Risk appetite and management

Risk appetite refers to the extent of financial losses an organization is willing to accept to achieve its strategic objectives before external intervention becomes necessary. In an insurance context, this translates into thresholds such as:

• Acceptable deductible amount

• Financial threshold at which external insurance is requested

• Internal reserve level for self-insurance

A clear risk appetite allows you to standardize decisions, to articulate them in your risk management policy, and to justify your trade-offs to your governing bodies.

2. Define your franchise/self-insurance strategy

For an SME, the decision depends on three parameters: financial capacity , risk profile , and total anticipated cost .

2.1 Assessing your financial capacity

Before increasing your deductible or opting for a form of self-insurance, consider the following:

• Available liquidity to absorb potential losses

• Cash flow volatility

• Access to financing if a major disaster occurs

A CFO must be able to simulate the impact of typical losses on liquidity ratios and working capital .

2.2 Analyze your risk profile

Document your history:

• Frequency of claims in recent years

• Most expensive types of claims

• Direct and indirect costs (production stoppages, loss of contracts, reputation)

This analysis helps to identify cases where a higher deductible makes financial sense (predictable and low-cost claims) and those where caution is necessary.

2.3 Compare net costs

The rationalized decision is based on a comparison:

Insurance cost with low deductible

• Higher premium

• Lower cost in the event of a minor claim

Cost with high deductible / self-insurance

• Lower premium

• Internal provision for losses

• Potentially no access to the insurer's expertise or network

Documenting these comparisons (without arbitrarily quantifying) helps decision-makers visualize overall cost scenarios over several fiscal years.

3. Practical piloting and documentation

What needs to be documented

• Internal franchise policy and thresholds adopted

• Historical statistics of claims by type and frequency

• Sensitivity analyses of liquidity to severe losses

• Procedures for declaring or waiving the right to declare

• Funds or reserves dedicated to self-insurance

Box: Essential documentation

• Risk appetite policy approved by management

• Table of historical claims and decision thresholds

• Cash flow plan for a major disaster scenario

• Record of provisions for losses

3.1 Adjusting one's franchise in practice

An SME can decide:

• To increase one's deductible to reduce one's premium when minor claims do not significantly impact one's operations.

• To self-insure certain risks (for example, a limited operating loss) according to one's reserve capacity.

In all cases, this decision must be guided by a formal framework and reviewed periodically (for example during the annual audit of the insurance portfolio).

4. Practical Scenarios

4.1 Case study: high deductible on a fleet of vehicles

A small business with several company vehicles notices that most claims are minor (small collisions, inexpensive repairs). Instead of paying a higher premium with a low deductible, it decides to increase its deductible to a level its cash flow can absorb without stress .

Expected result: a significant reduction in annual premiums, while maintaining reserves dedicated to covering these minor losses. (no fabricated figures)

4.2 Case study: self-insurance on highly predictable risks

An SME with a history of frequent but minor claims may choose not to report claims below a defined threshold and use an internal reserve to cover them. This functions as a form of self-insurance or “risk retention” for controlled losses.

5. Guidelines and checklist

| Step | Action | Decision to be implemented |

| Historical analysis | Collect claims data | Deductibles to consider |

| Financial capacity | Simulate cash impact | Franchise threshold |

| Risk appetite | Formalize thresholds | Self-insurance or not |

| Documentation | Record decisions | Audit & periodic review |

6. Common mistakes and how to avoid them

Error 1: lack of formal policy

Without policy, trade-offs are inconsistent. Solution: formalize risk appetite and franchise thresholds.

Mistake 2: Relying solely on the bonus

A low premium can hide significant costs in the event of a claim. Solution: compare anticipated net costs.

Mistake 3: Neglecting cash flow effects

An unforeseen disaster can deplete reserves. Solution: cash stress test.

Error 4: No periodic review

The risk market is evolving. Solution: annual portfolio review.

7. Questions to ask your insurer/broker

1. How does my current deductible affect my overall premium?

2. What specific risks could be advantageously self-insured?

3. What are the impacts of frequent crossings on my history?

4. How do I document my risk aversion decisions?

5. Is there a balance point between franchise and bonus for my profile?

6. What level of internal reserve do you recommend?

7. What risks are not covered if I increase the deductible too much?

8. What is your experience with other similar SMEs?

9. How do you manage recurring risks in the portfolio?

10. What indicators do you monitor to adjust the strategy over time?

Conclusion

Determining an optimal deductible level and evaluating a self-insurance approach must be part of a clear, documented, and regularly reviewed risk management policy. For an SME, these decisions translate into measured financial trade-offs, which must be managed like any other governance indicator. The next step is to formalize your risk appetite policy and integrate these elements into your annual insurance portfolio audit. This strengthens the alignment between business strategy and risk management.