An Aggregate Deductible Fund (ADF) is a self-insurance pool of funds that is commonly used by buying groups to manage their risks.
Buying groups are formed by collectives of companies, community groups, religious institutions, sporting organisations and others who group together because they have similar insurance needs.
ADFs allow the insured group to protect themselves by paying for certain losses out of the fund.
- A buying group may agree to self-fund any claims up to $250,000 – this is called the self-insurance retention.
- If a claim is greater than the self-insurance amount, it is covered by their insurer.
- The insurer will set an agreed amount for the maximum amount that will be covered by a claim.
- There may be some element of risk that is uninsured, if the insurer caps a limit on a claim, that is below the known maximum-value.
What are the benefits?
- Buying groups can increase the amount of their deductible as needed
- Where insurance is unavailable or prohibitively expensive, ADFs can provide some protection
- The higher the deductible, the insurance premium will reduce
- Self-insurance levels can be changed to manage liability and accommodate ex gratia payments
- Faster recovery from a claim, as the process to fund can make payments while the loss assessment is underway
Who uses ADFs?
Groups of organisations, individuals, industry associations, religious groups and community groups that share a common interest and want a joint approach to insurance use ADFs.
The common interests and alignment may be around an industry (E.g. hairdressers), a religion (E.g. Catholic Diocese) or, a profession (E.g. architects).
A recent ADF example is their use to enable publicly listed organisations in Australia to reduce premiums for Directors & Officers indemnity insurance.
As the insurance market hardens and premiums continue to escalate, ADFs are becoming an increasingly popular method of managing risk, protecting organisations and managing costs.