Self-Insured Retention (SIR) insurance is a type of policy where a company assumes greater financial risk for smaller claims to adequately protect against catastrophic claims. Unlike a traditional insurance policy, where the insurer comes in immediately, the SIR policy requires the policyholder to pay his portion before a dime is paid by the insurance company.
SIR typically works for large, often multinational corporations. If you own a smaller business that you want to protect against losses, an insurance broker such as AP Intego can shop and compare your specific needs to get you proper coverage at an affordable price. Get started online in minutes.
How the Self-Insured Retention Works
Self-Insured Retention (SIR) insurance means the company retains a specific portion of insured risk, often valued at millions of dollars. It is a hybrid between being self-insured and assuming all risk and transferring risk to a third-party insurance company. Companies using SIR have analyzed small risk and insure for catastrophic claims.
Being eligible for a SIR policy means a company meets the financial audit and credit requirements to hold such a large financial stake in claims. Underwriting insurance carriers for SIR policies protect their interest by properly vetting company applications. Because of the high stakes of claims, both the insurance company and the business must fully understand respective obligations.
What Self-Insured Means
Being self-insured is when a person or company is assuming financial risk due to a loss on their own. The company must have the financial resources to pay the self-insurance amount. A common example of self-insurance includes a business owner not having any insurance and relying on his business assets to pay for any losses. Some companies have self-insured thresholds well above what the actual insurance policy covers.
There are three ways a company assumes a portion of liability via self-insurance:
Self-Insured: There is no policy in place and the business owner is responsible for any loss, including theft, lawsuit liabilities, and property damage to leased spaces.
Deductible: This is the amount on an insurance policy that the business owner is willing to pay during a loss. The higher the deductible, the lower the premium costs.
Self-Insurance Retention: A policy that provides coverage for claims made above the self-insured component, where the company handles all claims until a specific threshold is met then the insurance pays remaining claims up to the policy limit.
Definition of a Deductible
The deductible is another form of self-insurance where the business owner chooses to be responsible for a designated amount before insurance pays the rest. There is also the SIR policy that states the insurance company won’t even be involved until a minimum amount is paid by the company.
Other types of self-insurance include a deductible on a more commonly used insurance policy and pure self-insurance, where the company has no third-party insurance provider to assign the risk to and assumes it on its own.
Define Self-Insured Retention
The SIR policy is really a hybrid between the two other types of self-insurance concepts. The portion that the company assumes is like the deductible, where the higher the SIR clause is, the lower the overall third-party premium is. And like the pure self-insured policy where a company doesn’t assign risk to a third-party provider, the SIR assumes not just the risk, but the administrative components of all claims until the limit is met and the SIR clause takes over.
What Is Self-Insured Retention Insurance?
However, there are nuances to this concept that are easily confused. As a specific insurance method, SIR is a clause on some insurance policies setting a layer of financial responsibility on the insured. A more common layer of financial responsibility is the deductible that most business owners are familiar with. These are easily confused, since both set financial layers on the person paying premiums.
Who Self-Insured Retention Is Right For
Self-Insured Retention (SIR) is not for every business because major claims payouts could lead to bankruptcy. Multi-million dollar companies use SIR to mitigate the cost of insurance by administering and paying small claims. It is a highly sophisticated option requiring companies maintain large capital assets to mitigate high-level costs in a variety of ways.
Don’t consider using SIR unless your company has:
- Significant assets – Companies must pay all the costs of claims, administering claims, and defending against claims until the SIR threshold is met.
- An administrative team capable of managing claims- Claims can get denied if the administration of the claim prior to the SIR threshold is not properly managed.
- A clear understanding of risk and loss history- Insurance companies remain solvent because they understand how to price risk. If you are unsure about what normal claim history is for your business or your industry, seek more traditional policies.
The SIR policy is often confused with owner-carried insurance and the deductible in traditional insurance policies. Both methods of self-insuring require large capital reserves or access to liquid assets. Businesses with little cash reserves are vulnerable to the potential claim funding requirements.
Insurance is about managing risk. A SIR policy requires that the business has the same level of risk assessment sophistication as a commercial insurance carrier.
Self-Insured Retention Costs
Self-Insured Retention (SIR) policies are written by specialty insurance brokers and carriers. The process requires review of the business history, the management’s experience, credit checks, and a full audit of the financials. Because of the matrix that determines a custom policy premium, there is no simple way to get a quote and estimate costs.
Unlike insuring a business location with business property for a limited amount, SIR isn’t something you establish overnight. It is a sophisticated process where the insurance company serves as an advisor for high-level risk. Be prepared with all company documents for a full underwriting process to take place.
If a SIR isn’t right for your business, and you would like a simplified process when it comes to shopping for coverage, reach out to AP Intego. AP Intego is a reliable broker that will work with top providers to find you the right insurance for your business.
Self-Insured Retention Providers
Those who are eligible for Self-Insured Retention (SIR) insurance must find a provider experienced in their industry and willing to write the policy. Unlike commonly used commercial insurance carriers like Next Insurance, companies that underwrite SIR insurance don’t always underwrite SIR insurance in your niche.
Some of the top SIR insurance providers in various industries include:
Brunswick Companies works with new to Fortune 1000 companies using SIR insurance as part of a risk financing strategy, often but not limited to real estate holding companies. Brunswick Companies is well-versed to walk business management through the requirements of the self-insured component, following protocol. The insurance broker also provides other commercial lines of insurance and assists with comparing and contrasting the benefits of specific policies.
The ICW Group is a multi-line insurance carrier covering auto, earthquake, and workers’ compensation policies. Companies with large fleets or real assets gain a partner capable of assessing risk across several commercial insurance lines. This is a privately-held insurance company specializing in risks considered difficult to place.
Zurich is an international risk provider with top ratings across the world. Capable of performing risk assessment and developing customized solutions for unusual risk scenarios, Zurich offers hands-on risk management that protects the business and the insurer. The analytics tools at Zurich help businesses fully understand the potential risks with SIR policies.
Allianz Global Corporate and Specialty
Allianz Global Corporate and Specialty insures corporations around the world in various industries, including aviation, entertainment, and engineering. The largest companies around the world trust Allianz for risk assessment and insurance.
Self-Insured Retention Features
When a company has a Self-Insured Retention (SIR) policy, it effectively has no insurance representation until losses meet the threshold defined in the contract. That is the significant difference between SIR policies and standard business policies that have a deductible. Standard business insurance policies always have third-party involvement, while SIRs don’t.
The key features of the SIR policy include:
- High company exposure to top-end risks.
- Large dollar threshold before insurance kicks in.
- Insurance covers catastrophic or ongoing claims above threshold.
A company wants to reduce high insurance premiums and decides to obtain a SIR policy with a threshold trigger of $1,000,000. The company meets underwriting guidelines and obtains the policy with an additional $10,000,000 in coverage from the insurance carrier via the SIR.
The company receives claims throughout the year resulting in $1,100,000. Up until the $1,000,000 threshold trigger, the company not only had to pay the claims fully, it had to administrate all aspects of claims management and pay all defense fees to defend itself totally, for another $750,000. Thus the company had to pay out of pocket a total of $1.75 million dollars before the threshold was met and the SIR starting administrating and paying claims.
Self-Insured Retention Example
When thinking about big risk and SIR, consider a major airline carrier. They may not have a policy that covers all the little trip and fall accidents that happen during the course of a flight or boarding a plane. The company most likely settles these claims, paying damages, and opts for a SIR policy to kick in if there is a plane crash with 300 people dying in the event.
The costs of covering injuries and claims against the carrier throughout the year might tally $3 million to $4 million dollars. It wouldn’t be cost effective for the air carrier to transfer lower cost risk that would be paid anyway. It makes sense to set a threshold the company can deal with, perhaps $5 million or $10 million dollars, to pay families who lost lives in the event of a plane crash that could exceed $50 million.
Pros & Cons of the Self-Insured Retention
Self-Insured Retention (SIR) policies may be attractive to business owners seeking to save costs. However, there are risks involved that can have a significant impact on a company not maintaining traditional insurance policies at all risk levels.
Pros of the Self-Insured Retention
The cost of insurance for large organizations is simply not cost-effective when looking at the potential losses. Although companies have to pay to manage and fulfill smaller claims, the net effect saves money in the long run while protecting against the biggest of potential losses.
A business considering implementing a SIR policy is often attracted to the following benefits:
- Insurance cost savings – The more a company retains the financial risk by using an SIR, the lower the insurance premiums.
- Expedited processing – Because a third-party insurer is not involved, the company is able to efficiently process claims and move on with business needs.
- Affords greater coverage – The coverage with SIR means the initial self-insured component sets the first limit and the additional clause provides extended coverage without being reduced by the self-insured component.
Cons of the Self-Insured Retention
While the benefits of SIR policies are highly attractive, problems can ensue for a business not completely prepared for various claims scenarios. When a third-party isn’t taking care of all claims from start to finish, there are risks of financial hardship or administrative problems.
There are several negative components of a SIR policy to consider:
- Must be big enough – Smaller companies risk insolvency with hitting the threshold amount that triggers the SIR policy, making these policies only attractive to huge corporations mitigating insurance costs.
- Potential claim denial – The third-party insurer may decline claims once the SIR clause kicks in because of how the business handled the self-insured component.
- Financial risk – A high-claims scenario can create financial devastation to a company not truly prepared for the costs associated with administering, defending, and paying claims.
- Administration of claims – This is a cost and potential liability for a business where the self-insurance retention burdens the company with constantly dealing with claims and the triggering of the SIR clause.
Before choosing a SIR option, consult with business advisors and insurance carriers to make sure you are qualified both financially and administratively to properly execute a SIR plan.
Alternatives to the Self-Insured Retention
There aren’t many alternatives to Self-Insured Retention (SIR) since it is a highly specialized niche in the industry. The only real options are to consider self-insuring completely or to get a traditional policy with a high deductible to offset annual premium costs.
Alternatives to the SIR policy are the other variations of self-insurance:
Company Funded Plans
The business uses its own resources to completely insure itself for designated losses. For example, a real estate investor might have enough in assets to 100% guarantee the amount of a complete loss on a property and never assign the risk to a third-party insurance company.
This is a true self-insured plan that doesn’t transfer any risk to a third party. If the company is hit with a claim that exceeds its ability to pay, it will either have to borrow, settle, or declare bankruptcy.
High-Deductible Business Policies
A business that doesn’t want to assume 100% of the risk but wants to mitigate high premium costs can seek a high-deductible insurance policy. The higher the deductible, the more the company assumes financial risk to loss and the premium prices go down.
This is an option for many businesses that feel they are paying huge premiums each year because of their risk classification. Companies that have hardly any claims benefit from increasing the deductible to the maximum limits and using the premium savings to start a savings fund specifically for any future claim.
Self-Insured Retention Frequently Asked Questions (FAQs)
Self-Insured Retention (SIR) is a niche in the insurance industry relevant to multi-million dollar companies with vast resources. There may be better options for a small business owner.
Is Self-Insured Retention the Same as Self-Insured?
SIR is not the same as being self-insured. While being self-insured is a component of a SIR policy, being self-insured can also mean having no insurance at all or having a policy with a deductible. Therefore, SIR can be a type of self-insured, but self-insured isn’t always a SIR policy.
Why Is a Deductible Different Than Self-Insured Retention?
A deductible is an amount a company is willing to pay in an insurance loss, where the claim is managed by the insurance carrier. SIR has a threshold that the company is responsible for, including the amount paid, administrative fees, and legal fees for the claim. Only then does the insurance carrier engage.
Is Self-Insured Retention Available to Any Business?
A SIR policy is not available to every business because most business don’t have the assets to warrant it. A SIR policy is specialized for companies with millions in annual revenues. It requires specialty underwriting that includes an assessment of the assets, debts, and overall creditworthiness of the company. Not every company will qualify.
Self-Insured Retention (SIR) insurance is a policy designed to reduce the risks of large companies to mitigate the highest risks. Companies might assume hundreds of thousands of dollars in risk before the insurance policy terms kick in. Assuming the risk means running the administrative tasks and absorbing all costs for claims under the SIR threshold.
If you own a small business that wouldn’t benefit from a SIR but needs fast and affordable coverage, reach out to AP Intego. AP Intego has nationally licensed agents that shop and compare your needs to find you proper coverage you can count on.