As a business owner, protecting your business from financial losses is you top priority. Recent statistics reveal that the average cost of a commercial insurance claim is about $30,000. Thus it is a solid risk management strategy. One option for protecting your business is through Self Insured Retention (SIR) insurance policies. In this article, we will delve into the concept of Self-Insured Retention, how it works, and the potential benefits and drawbacks associated with this risk management strategy. By shedding light on this increasingly popular approach, we aim to provide clarity and insights for businesses and decision-makers navigating the complex realm of risk management and insurance.
What is self-insured retention?
Self-Insured Retention (SIR) is a risk management strategy that some businesses use to manage their insurance costs. It’s important to note that an SIR is not the same as a traditional insurance deductible, although they serve somewhat similar purposes.
1. self-insured retention Definition:
- Self-Insured Retention (SIR) is an amount of money that a business agrees to pay for covered losses before its insurance policy kicks in.
2. Key Characteristics:
- Business Assumes Risk: With an SIR, the business takes on a portion of the risk for covered losses. This means the business is responsible for paying any losses or claims up to the SIR amount.
- Cost Management: SIRs are often used to manage insurance costs. By agreeing to a higher SIR, a business can reduce its insurance premiums because it’s taking on more of the risk.
- Customizable: The SIR amount can be customized based on the specific needs and risk tolerance of the business. It can vary widely from one policy to another.
3. Use Cases:
- SIRs are often used in general liability, workers’ compensation, and professional liability commercial insurance policies
- Businesses with a strong risk management program and financial stability may opt for higher SIRs to reduce premium costs.
what does self insured retention mean?
Retention in insurance means that an insurance company pays claims made against you up to a specific amount. Accidents that exceed the exact amount are then paid by the insurance company.
Let’s say Policy A and Policy B have a $30,000 claim limit. Policy A has a deduction of $30,000, and Policy B has a SIR of $30,000. Policy A gives $100,000 to fight and pay for a claim worth $100,000. The insured will pay $30,000 after the claim.
Policy B requires the insured firm to pay $30,000 for defense/indemnity, while the insurer covers the remaining $70,000. Company indemnity payments.
How does self-insured retention work?
The insured party maintains the first part of the risk in (SIR). Here’s how:
- A SIR insurance coverage is purchased by the insured. Claims beyond a specified amount are covered by the policy.
- The insured pays the first portion of a claim up to the SIR limit.
- Insurance covers the claim above the SIR limit up to the policy limit.
- The SIR is similar to a deductible, except it’s usually higher. SIRs ranging from $10,000 to $1 million or more.
- The greater the SIR, the lower the insurance rates. It lowers the insurer’s risk.
- Even for substantial claims, the insured party must pay the SIR. The insurer pays claims above the SIR.
- SIRs are used with commercial umbrella insurance, excess liability insurance, and some property insurance.
What is the difference between deductible and self-insured retention?
Deductible and self-insured retention are two ways of sharing the risk of losses between the insured and the insurer. They both require the insured to pay a certain amount of money before the insurer pays the rest of the claim. However, they have some important differences that affect how they work and how they impact the insured. Here are some of the main differences:
Paying the deductible: The insurer pays the claim first and then invoices you for the deductible. In a SIR, you pay the whole SIR before the insurer pays anything.
Deductibles lower insurance limits. A $1 million coverage with a $10,000 deductible has an effective maximum of $990,000. With a self-insured retention, the SIR rarely affects the insurance limit. A $1 million insurance with a $10,000 SIR has a $1 million effective limit.
How it covers defense costs: A deductible normally excludes defense costs, which the insurer pays. However, substantial deductibles may apply to damages and defense. Self-insured retentions include defense expenses in the SIR amount, which you pay.
How it affects claims management: The insurer investigates, negotiates, and settles claims. Some insurers let you handle modest claims within the deductible. With a self-insured retention, you may have more control over claims handling and can handle damages and defense costs within the SIR.
How it affects certificates of insurance: Certificates of insurance normally only state the insurance limit and not the deductible. Certificates of insurance for self-insured retentions normally show the maximum and SIR.
Self-insured retention example?
Take a look at the following illustrations to better grasp the idea.
Example #1
Peter decides to add a self-insured retention endorsement for the sum of $2,000 to his motor insurance policy. A year later, Peter rams his car into a business, costing him $2500 in repairs. George had $1400 in retention at the time of the accident. If Peter has a retention insurance, his insurer will pay $1,100 of the total repair costs, and he will be responsible for the remaining $1,400.
Example #2
Example: Imagine a scenario where a policy, let’s call it “Policy B,” contains a $25,000 SIR. If a claim arises, the insured must pay the initial $25,000 of defense and indemnity costs. Once this amount is met, the insurer will handle the remaining expenses, such as an additional $75,000 in defense and indemnity payments.
What is self-insured retention amount?
An insurance claim’s self-insured retention (SIR) amount is the sum that the insured party consents to pay before the insurer starts paying. In essence, it functions like a deductible but for higher amounts.
When a business decides to self-insure for particular risks up to a predetermined limit, they assume the risk themselves as opposed to completely insuring it with an insurance provider. The SIR is an indicator of the level of risk that the company is ready to take.
For example, if a business’s general liability insurance has a $100,000 SIR:
- The corporation covers the entire cost of claims under $100,000 by itself.
- The insurer pays the amount over $100,000, up to the $1 million maximum, for claims between $100,000 and $1 million (the policy limit in this case).
- For claims over $1 million, the insurer only covers the first $1 million and leaves the rest up to the employer.
Self-insured retention Benefits
SIR is a risk management technique in which a business takes responsibility for claims rather than transferring all risk to an insurance company. The advantages of self-insured retention include the following:
Increase in an insurance policy, sir limit.
Increased insurance policy limit—Because SIRs never erode the yearly aggregate limit, firms can use the whole insurance limit.
Control over the event of a adjustments
Businesses can choose whether to pay or challenge claims below the SIR amount.
Clean loss history
Insurers frequently pay out more minor claims with deductible-based coverage, so a company’s loss history is impacted. SIR amount allows businesses to choose which shares to defend, resulting in a cleaner loss history and better rates from future insurers.
No collateral requirement
Collateral requirements can be considerable, frequently multiples of the payment of the total deductible for the year. SIR policies don’t need collateral.
Lower insurance premiums:
Businesses can reduce their insurance premiums cost by using Self Insured Retention.
Increased cash flow
Businesses may experience greater revenue when they make capital on a claim instead of using it to increase insurance premiums.
What is self insured retention on an umbrella policy?
Self-insured retention (SIR) is the amount the insured party must pay out-of-pocket before the umbrella insurance commences coverage. It’s like a deductible in a conventional insurance policy, except it’s utilized in umbrella coverage.
Umbrella insurance policies extend primary insurance coverage. If a claim is not cover by the primary policy but by the umbrella policy, the insured party must pay the SIR before the umbrella insurance coverage kicks in.
For instance, if a firm has a $1 million umbrella policy with a $10,000 SIR and a claim develops that is not covered by the primary policy but is covered by the umbrella policy, the business must pay the SIR first. After then, the umbrella policy would pay up to $1 million for the remaining claim.
When is self-insured retention applied in an umbrella policy?
An umbrella policy’s self-insured retention applies when the policy pays for a loss that is not covered by the underlying policy but is covered by the umbrella policy. This implies the insured will be responsible for paying a minimum amount toward the loss before the umbrella insurance kicks in. For instance, if you have an umbrella insurance that covers defamation lawsuits but your underlying policy does not, you will be responsible for the SIR amount before your umbrella policy begins paying its share. The umbrella policy is where you’ll look for the self-insured retention amount, which might change from loss to loss.
What is the difference between self-insured retention and captive retention?
Both forms of self-insurance, self-insured retention and captive retention, involve a company setting aside money to fund future losses instead of paying premiums to a third-party insurance company. However, they have some differences.
Self-insured retention is a straightforward self-insurance strategy in which the business establishes a trust fund or savings account to cover future claims. The company manages the funds and pays the claims. Eliminating the administrative costs and profits of commercial insurers can save money through self-insured retention, but it also exposes the company to the risk of not having enough funds to cover large or unexpected losses.
Captive retention is a more formal and intricate kind of self-insurance in which the business establishes a captive, or independent insurance firm, to cover its risks. A separate legal entity issues policies, collects premiums, and pays claims. The captive can also invest the premiums and earn income from underwriting profits. Captive retention offers more flexibility and control over the coverage, pricing, and claims handling of the insurance program, but it also necessitates greater regulatory compliance and capitalization.
What is a corridor self-insured retention?
Corridor self-insured retention (SIR) reduces the cost of excess or umbrella insurance by using a type of deductible. A self-insured layer separates the primary layer of risk, which can be insured, self-insured, or funded in a captive, from the layer immediately above the primary. Some people refer to it as a “bikini deductible” because it creates a gap in the middle of the coverage, resembling a bikini. For example, if you hold a primary insurance policy with a limit of $5 million and an excess policy with a limit of $15 million, you can place a corridor SIR of $1 million between them. You will have to pay for any losses between $5 million and $6 million out of your own pocket, but you will also pay less for the excess policy. You can design a corridor SIR to cover per-occurrence limits or aggregate limits, depending on the risk and the excess insurance pricing. Balancing the trade-off between risk retention and risk transfer is a way.
