Aggregate deductible funds (ADFs) are becoming a more common type of insurance alternative for buying groups who are looking for new ways to manage their risks.
What is an aggregate deductible fund?
An ADF is a self-insurance pool that is often used by corporate or community groups, religious institutions, sporting organisations or other groups of buyers who have similar insurance needs. It requires the insured group to self-insure certain losses themselves by paying those losses out of a specific fund.
ADFs are also used to subsidise insurance deductibles across the buying group, allowing them to reduce the cost of their insurance program by retaining some of the losses. For example, a sports club may agree to self-fund claims up to $100,000 on its personal accident policy and then the insurer pays any claims in excess of $100,000 (up to the limit of insurance). The first $100,000 is called the self-insured retention.
Are ADFs a regulated financial product?
If you are managing an ADF, you may be:
These are financial services that are regulated under the Corporations Act and generally you must hold, or be authorised under, an Australian Financial Services (AFS) licence to carry out these activities.
However, there are a number of exemptions you may be able to rely upon, depending on the structure of the ADF:
Groups/bodies who do not qualify for one of the exemptions may be providing a financial service, and will need to:
A regulated ADF may also require:
Sometimes it is impossible to structure an ADF so that it qualifies for an exemption, and it can be expensive and time-consuming to seek an AFS Licence. However, you may be able to partner with a manager who holds a Licence.
Even where a group does qualify, you might also prefer to partner with a professional, where you require additional skills or resources. It is common for ADF buying groups to partner with a broker to support the placement of the insurance program and to assist by helping with claims decisions, administration of the fund and collections and payments for the group, for a set period of time to gain the necessary skills and qualifications to apply for an authorisation themselves.
Even if your ADF is not a regulated financial product, it is important to have a legal structure and appropriate governance policies and procedures. This provides certainty to the members of the group and ensures that the ADF can be managed in a business-like manner.
For example, rules similar to those that apply to common or managed funds are useful, as they give all members of the group an understanding of their legal rights as beneficiaries of the ADF:
What are the benefits of an ADF?
ADFs are becoming more popular as the insurance market is hardening, because the group can increase the amount of their deductible on an ‘as-needed’ basis.
For a buying group, the benefits of an ADF are:
Who can use ADFs?
ADFs are frequently used by:
It’s important to seek professional advice before you set up an ADF. You need legal advice on how this arrangement should be structured, whether it is a regulated financial service and you should also seek taxation advice.
If you’d like to set an ADF up and want to know more about how you could take advantage of this insurance alternative – get in touch. We’d be happy to help.