Defining Self-Insured Retention (SIR).
An SIR is a specified dollar amount paid by the insured before the insurance policy responds to a loss.
An insurance policy with an SIR program places the responsibility for claims handling, up to the amount of the retention, in the hands of the insured rather than the insurance company. Claimants receive payments for claims costs, including claims handling, defense, allocated expense costs and indemnity payments directly from the insured. Once the limit of the SIR is reached, the insurer takes control and handles the management of the claims.
Claims management options
Companies who choose an SIR strategy have three options when it comes to the management of the claims:
- The insured handles the claims.
- The insurer’s claims department retained (for a cost) by the insured assists with the claims.
- Most often, a third-party adjusting company manages the claims. (See why under: The TPA and SIR Relationship section.)
Advantages of an SIR:
- Safeguards against the instability in the insurance market’s pricing and coverage.
- Greater control over the claim’s adjustment process. The insured takes control and handles the claims management process to include the choice of a defense council.
- Incentive to control losses since the insured will pay many of them using their funds.
- Reduces premium costs.
- Improves the company’s cash flow as no pre-funding of losses or large capital expenditures are required, whereas a large deductible requires that the insured provide a letter of credit or some other acceptable form of collateral to cover expected losses that occur within the deductible.
- Cash flow may improve when paying losses as they occur rather than paying for them in advance via insurance premiums.
- Added awareness. As the company is now spending its own money and safety within the workplace, this becomes a higher priority.
Knowing the environment. Other plans.
How do you decide if an SIR is the most beneficial plan for your business? Discuss with your Broker, Program Administrator, Wholesaler or Captive Manager about plans that best fit your business needs.
Deductibles
- Simpler, more straightforward approach to claims than an SIR.
- Less involved. Insurer takes more responsibility and requires less effort from the insured.
- A deductible typically erodes the policy limits; the SIR does not.
Captive Insurance
- Higher administrative complexity.
- Long-term strategy, costs and savings.
- Best candidates: larger companies who want maximum control over risk management and have unique risk factors that don’t fit within traditional insurance policies.
Loss Portfolio Transfer (LPT)
- Used to transfer claims liabilities (i.e., medical malpractice or auto liability) to a reinsurer.
- Used to provide capital relief and improve financial stability.
Retention Limits in Umbrella Policies
- A form of deductible or out-of-pocket payment.
- Primary function is to manage unexpected liabilities above primary insurance limits.
Risk Retention Groups (RRGs)
- Emphasis on liability insurance coverage.
- Lower premiums, higher initial investment.
- Best candidates: High-risk industries in niche markets seeking affordable insurance in the commercial market.
- RRGs and SIRs can be combined to balance costs and flexibility.
Finding the right level of retention.
Consult with your insurance broker or advisor on the following factors to help you determine the optimal SIR level for your organization:
- Claims frequency & complexity
- Risk tolerance
- Financial capacities, status and budgets
- Company stability
- Historical loss data
- Policy exclusions
- Cost-benefit analysis
- Legal defense cost & regulatory requirements
The SIR and TPA relationship.
Under a Self-Insured Retention, outsourcing claims management to a Third-Party Administrator offers many benefits to the insured. The overall goal is to support efficiency and streamline costs and processes through specialized claims and risk knowledge and strategies. In addition to this, using third-party administrators to handle claims is the most common for four other key reasons:
- Flexibility: Having the ability to scale services and adapt to evolving claims volumes and complexities.
- Loss management: uses technology, programs and expertise to minimize claims losses, prevent future claims and negotiate settlements.
- Oversight & compliance: follows legal and regulatory requirements held in different jurisdictions as well as accurate, active claims reporting.
- Minimizing resource costs: able to move more easily through larger more difficult claims or multiple claims. Avoids the expenses for the insured to hire and train new staff to fill this need.
Click here to read more about a TPA’s role in the risk landscape.
Protect your business and bottom line.
As a Third-Party Administrator who partners with organizations with Self-Insured Retentions, we know how to support your claims efforts to keep you moving forward.
Napa River Insurance Services, Inc.
A Third-Party Administrator
Napa River Insurance Services, Inc. is a wholly owned subsidiary of Hudson Insurance Company.
866.407.7060
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