A self-insured retention (SIR) can be a money-saving insurance tactic for many growing businesses. As premiums increase in the commercial habitational sector, an increasing number of organizations seek alternatives to reduce insurance costs. The SIR can be one tactic. Let’s review the difference between a deductible and a self-insured retention.
What is a Deductible?
Most insureds understand the deductible concept from their own insurance policies. Most smaller organizations opt for a deductible, often the amount suggested by their insurance broker. In today’s hardening insurance market where premiums are rising and underwriters are insisting on higher deductibles, a deductible approach may not be the best option. No matter the size of the deductible, the insured has little input or control over whether its carrier denies a claim or pays it. When the carrier opts to pay a claim when you have little or no liability, payment of even nuisance claims will damage your loss history.
Here’s an example that highlights the importance of claims payment management:
A tenant, a bit of a hoarder, has a slow leak in the plumbing under her bathroom sink. Rather than report the problem, she ignores the leak for months. Eventually, it damages all the items she stored beneath her sink. Finally, she calls maintenance, who fixes the leak. She then files a claim for several thousand dollars for all the expensive items stored beneath her sink, alleging as her landlord, you had a duty to inspect at least annually.
Insurers consider these types of claims “nuisance claims.” Commercial policies have a condition that states the carrier can settle or defend any claim as the adjuster sees fit. While you aren’t negligent, the insurance company takes the expedient route and pays the claim. Even when your organization did nothing wrong, this small claim and others like it will count against you at renewal. Who needs that, right?
What is a Self-Insured Retention?
If you manage a larger book of properties, you may want to investigate taking a self-insured retention. What differentiates an SIR? According to International Risk Management Institute (IRMI), there are some common differences between a deductible and an SIR. These include:
- The insurer’s responsibilities after a loss
- Financial requirements
- Cost of defense
- Certificates of insurance
- Erosion of policy limits
We’ll address each of these differences.
- Under an SIR, the insurance carrier doesn’t involve itself in losses that will not “penetrate” its attachment point. For example, if your organization takes a $100,000 SIR, your company will handle and pay the claims under $100,000, usually with assistance from a third-party administrator (TPA). You will have a duty however, to notify the insurer if any claim comes close to hitting that attachment point.
- Under financial requirement concerns, if your organization cannot pay a claim below the attachment point, your organization remains responsible, not the insurer. The insurer will not insist on collateral or a letter of credit. However, some states do not allow certain coverages like workers compensation to use a self-insured program. The state may allow only large deductible programs, and these require collateral or letters of credit.
- In a standard insurance program, the insurer pays defense costs for most coverage lines (except professional liability often), paid in addition to the limits of liability. This benefits insureds because expenses to investigate and defend claims are generally paid in addition to the policy limits. In an SIR program, your organization pays all expenses to investigate and defend until you reach your retention.
- Certificates of insurance must clearly state the self-insured status of the organization, because the insurer is not responsible to pay claims until your organization exhausts its retention. This may cause some organizations you do business with to request more information before they accept your self-insured program.
- Your SIR will not erode your annual aggregate limit of insurance. Your aggregate is the maximum amount the carrier will pay for losses during the policy period. If your aggregate limit under the SIR is $1 million and total policy aggregate limits are $5 million, you have $5 million of coverage over the $1 million SIR. As they grow, many organizations investigate the SIR for cash-flow and claims management purposes. After all, no one spends your money more wisely than you.
As rates continue to rise, savvy habitational risk managers seek ways to lower premiums and better manage their risk. The SIR is an important consideration as your real-estate organizations grows.
Before choosing the SIR route, here are a few factors you should analyze:
- Do you have 5,000 units under management? One you reach this size, an SIR program may be a strong option.
- Do you manage Class B and Class C properties? These property classes today require closer underwriting scrutiny when carriers evaluate new and renewal habitational business. If you manage these classes, an SIR can help you better determine which claims you pay and which you deny or defend.
- Do you have a risk manager on board? If not, is your chief financial officer ready to manage a more sophisticated insurance program? Once you institute an SIR, you’ll be responsible for handling all the claims under your retention from the first notice of loss to the final settlement.
- Do you have the resources and expertise to institute loss prevention strategies, purchase a risk management information system, or hire a third-party administrator with those capabilities? Your carrier may have provided loss data and loss control duties in the past under a deductible program. Once you begin to “spend your own money” to pay claims, you’ll need all those resources and more.
Decisions, Decisions, Decisions
Instituting a self-insured retention is a big decision. When you’re looking for risk management advice, IRMI offers great resources. To learn more about the difference between a deductible program and a self-insured retention program for your portfolio, email or call us at ReShield. We’re here to answer your questions.