Self insured retention
| Self insured retention |
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| See also |
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[1].
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[2].
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[3].
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[4].
It is advised to consider being a party of SIR policy only when a corporation possess[5]:
- 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.
Footnotes
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
