Self insured retention

Self insured retention
See also
Commercial lines Initial deposit Fidelity guarantee Paraplanning Finance company Compulsory insurance Cross margining Principal agent problem Confidentiality of information

Self-Insured Retention also called SIR is a type of insurance policy. In contrast to a traditional insurance policy, where the insurer covers the costs instantly, the SIR policy demands the policyholder to pay for claims filed against him. Money is paid by the insurance company, when insured company has to pay enough to exceed a threshold written in the policy. Another words, it's a type of policy, which covers claims filed above the self-insured aspect, where the company takes care of every claim, up to the moment when a specific amount of money known as threshold is met. Then the insurer pays all of the claims left up to the policy limit.

Who uses the SIR

Self-Insured Retention can not be used by every company. That's because paying out a major claims can lead to bankruptcy. Only companies which are big enough and have a lot of money use SIR to moderate the cost of insurance by taking care of small claims. This option require large capital assets to soften costs in a variety of ways. That's the reason why SIR is frequently used by the biggest, international corporations.

How does it work

This type of insurance settles that insured company is still in possession of a part of insured risk, sometimes estimated at millions of dollars. Different kinds of business insurances requires insurer involvement every time, SIRs don't. Self-insured retention policy is a combination of being self-insured, handling risk and moving that risk to another establishment - insurance company. Being able to be a party of SIR policy means that a company fulfill the financial audit and credit requirements, because insurers for multimillion-dollar SIR policies protect their interests. It is done by settling not easy to meet requirements, and by carefully checking every aspect of corporation's activity.

SIR policies are written by specialty insurance brokers personalized to an individual company market situation. The process of creating this kind of policy takes a lot of time. It also requires inspection of the business history, assets, credits, the management's experience, and of course audit of financials. Because of that customizable nature of this policy, there is no simple way to quote or estimate costs. SIR is not the type of policy that can be established within a month. It is an action, in which the insurer is an advisor in high risk matters. A company, that wants to be a party of this insurance needs to prepare every company's document insurer requires.

It is advised to consider being a party of SIR policy only when a corporation possess:

• Significant financial assets – corporation needs to cover all costs of handling claims and defending against them, up until the level of threshold.
• Administrative employees capable of managing claims – qualified staff is essential because SIR claims after meeting threshold can be denied by the insurer if the management of the claims before meeting the threshold was not proper.
• Understanding of previous, current and future risk and loss – insurers remains solvent and protect their cash flow because they carefully estimate and price the risk they takeover. If the company isn't sure about claim history, it should look for another types of policies. That's because insurer will not takeover risk of suspicious company.

Example

Perfect instance of using this type of policy can be described by the situation of airlines X. Those particular airlines X do not possess policies to cover all the small accidents that take place during taking off the planes, boarding, landing or the flights. So, airlines X deals with the claims concerning above aspects on its own. It has to pay for damages, compensations for the customers and cover court costs. Doing it by the use of its own financial assets. But, airlines X also possess SIR policy in case of plane crash, with 500 or more people dying, with a threshold of 10 million dollars, with additional 70 million dollars coverage. When that kind of plain crush takes place, airlines X takes care of claims up to the 10 million dollars. After exceeding that amount, insurer covers all of the remaining claims up to the 70 million dollars.

Advantages of Self insured retention

Self-insured retention (SIR) is a risk management technique used to share and manage the financial costs of insured losses. The following are the advantages of SIR:

• By implementing an SIR, businesses can have more control over their risk management strategy, allowing them to better manage their finances and avoid paying high premiums for coverage.
• An SIR also provides businesses with more flexibility in terms of their risk management strategies, since they can adjust the retention level to their particular risk tolerance.
• SIR also allows businesses to reduce their overall premiums since they are only paying for any losses that exceed the retention level, while the insurance company pays the rest.
• Since businesses are responsible for the first portion of any losses, they are incentivized to take proactive steps to mitigate risk and reduce the potential for losses. This can lead to cost savings in the long run.

Limitations of Self insured retention

Self-insured retention is a risk financing technique in which an organization retains some of the risk of a loss and pays for losses out of its own assets. Although self-insured retention can be a cost-effective way to manage risk, there are several key limitations that must be taken into consideration:

• Self-insured retention exposes an organization to potentially significant losses if a claim exceeds the retention amount.
• It is difficult to predict the frequency and severity of losses, making it difficult to accurately estimate the cost of self-insured retention.
• Self-insured retention can be difficult to manage if the organization does not have the expertise and resources to manage risk.
• Self-insured retention can be difficult to finance, as the organization must have sufficient funds available to cover the cost of a claim.
• Self-insured retention can increase regulatory and legal compliance costs, as the organization must ensure all applicable laws and regulations are met.

Other approaches related to Self insured retention

Self-Insured Retention is a self-insurance strategy whereby an organization assumes the risk associated with losses up to a certain amount, after which the insurance carrier assumes the risk. Other approaches related to Self-Insured Retention include:

• Captive Insurance: This approach involves an organization setting up their own insurance company to insure its own risks.
• Risk Retention Groups: These are groups of companies that pool their risks together to provide insurance coverage to each other.
• Reinsurance: Reinsurance is a form of insurance purchased by an insurance company from another insurer to reduce their own risk exposure.
• Risk Transfer: Risk Transfer is a process of transferring the risk associated with a particular activity or event to another party.

Overall, Self-Insured Retention is a risk management tool that allows organizations to assume some of the risk associated with a loss, while still having some insurance coverage in place. Other approaches such as Captive Insurance, Risk Retention Groups, Reinsurance, and Risk Transfer can also be used to minimize risk exposure.

References

• Evans B. S., (2009), The ABCs of SIRs., Schubert & Evans, P.C., p: 1-14,
• Ferragamo C., (2012), Self-Insured Retentions and Deductibles: Key Coverage Issues., Jackson & Campbell, P.C., p: 6-11, 67-82,
• Harris T. V., (2012), Washington Insurance Law., Library of Congress, subchapter: 31.1,
• Katz Z. N., (2011), A Primer on Self-Insured Retentions., Pugh, Jones & Johnson, P.C., Chicago, p: 1-5,
• Ostrager B. R., Newman T. R., (2015), Handbook on Insurance Coverage Disputes., Wolters Kluwer Law & Business, p: 1213-1219,
• Vozar R., (2013), Self-insurance retention. How to weigh the pros and cons of SIRs vs. deductibles., Smart Business Los Angeles, p: 1,

Author: Artur Bućko