What Is Self-Insured Retention?
A self insured retention (SIR) is a key part of many insurance plans. It’s the amount a company agrees to pay before their insurance coverage starts. This means the business takes on some of the risk itself.
With an SIR, a company pays for small claims out of its own pocket. Only when a claim goes above the SIR amount does the insurance company step in. This is different from a regular deductible.
SIRs are often used by bigger companies. They can help lower insurance costs. But they also mean the company needs to have enough money set aside to cover claims.
Here’s a simple example:
- SIR amount: $100,000
- Claim cost: $150,000
- Company pays: $100,000
- Insurance pays: $50,000
SIRs can apply to different types of insurance. These might include:
- General liability
- Product liability
- Workers’ compensation
Companies that use self-insured policies often have more control over how claims are handled. They can decide how to deal with smaller issues on their own. This can sometimes lead to faster claim resolution.
Self-insured retention can be a good choice for some businesses. But it’s not right for everyone and can be tricky for small service based businesses. A company needs to look at its finances and risk level before choosing this option.
Insurance Retention As A Risk Management Strategy
Insurance retention is a key concept in risk management that many businesses use to control costs and manage their exposure to potential losses. It refers to the amount of financial responsibility a company takes on before their insurance coverage kicks in.
When a company opts for insurance retention, they agree to pay for certain claims or losses up to a specified amount. This approach can lead to lower insurance premiums, as the company is shouldering more of the risk. It’s important to note that retention doesn’t mean avoiding insurance altogether. Instead, it’s a strategy where the business takes on a portion of the risk while still maintaining coverage for larger, potentially catastrophic losses.
There are different ways to implement insurance retention:Self-Insured Retention (SIR): This is a specific dollar amount that the insured must pay before the insurance policy responds to a claim Captive Insurance: A more complex form of retention where a company creates its own insurance subsidiary.
Now that we have a high level overview of insurance retention, lets turn our focus back Self-Insured Retention, as it’s a common method of insurance to consider as your business grows.
How is self-insured retention different from a deductible?
Self-insured retention and deductibles are both ways for companies to take on some financial risk, but they work differently.
With an SIR, the company pays claims up to a set amount before insurance kicks in. A deductible is money the company pays after a claim, which the insurer subtracts from the payout.
SIRs give companies more control over claim handling. They often manage smaller claims themselves. This can save money on premiums. But it also means more work for the company’s staff.
Deductibles are simpler. The insurance company handles all claims. They just subtract the deductible at the end. This is easier for the company but may cost more in premiums.
Here’s a quick comparison:
| Feature | Self-Insured Retention | Deductible |
|---|---|---|
| Payment timing | Before insurance pays | After claim is settled |
| Claim handling | Company handles up to SIR | Insurer handles all claims |
| Premium impact | Often lower | Usually higher |
| Administrative work | More for the company | Less for the company |
SIRs can affect policy limits differently than deductibles. With an SIR, the full policy limit often stays intact. Deductibles may reduce the total coverage available.
Should You Consider Becoming Self-Insured As A Small Service Based Business?
As we have detailed above, self-insured retention is a way for businesses to manage risk. Companies that choose this option pay a set amount for claims before their insurance kicks in. This is different from a regular deductible.
How can you decide if it is a smart move for your company?
To become self-insured, consider that your company needs to:
- Have strong financial strength
- Determine how much risk it can handle
- Choose the right SIR amount
- Set up a fund to cover potential claims
Self-insured retention works best for mid-size and larger companies. These businesses have enough money to cover some losses on their own. However, in some cases it may help lower overall risk for smaller businesses.
When a claim happens, the company pays up to its SIR limit. After that, the insurance company steps in. This system can save money on premiums. It also gives businesses more control over claims.
Another thing to consider, companies using SIR often hire a third party to handle claims. This helps them manage the process better. Most self-insured employers work with an insurance company or administrator for this.
Keep in mind that SIR is not the same as being fully self-insured. With SIR, a company still has insurance above a certain amount. Fully self-insured companies cover all their own risks.
Businesses thinking about SIR should talk to insurance experts. They can help decide if it’s the right choice. SIR can be a good way to lower costs, but it also means taking on more risk.
FAQ
What’s the difference between self-insured retention and a policy deductible?
Self-insured retention (SIR) and deductibles are different. SIR doesn’t lower the insurance limit, but a deductible does. With SIR, the insured manages claims up to the SIR amount. After that, the insurer takes over. Deductibles are simpler – the insurer handles claims from the start, and the insured pays the deductible amount.
How is self-insured retention used with umbrella policies?
Umbrella policies often use SIR. The insured covers a set amount before the umbrella coverage kicks in. This helps lower premiums and gives the insured more control over smaller claims. It also fills gaps between primary policies and umbrella coverage.
What does California law say about self-insured retention?
California has specific rules for SIR. The state requires clear SIR terms in policies. Insurers must explain how SIR affects coverage. California courts have ruled on SIR issues, shaping how it’s used in the state. These rulings affect claim handling and coverage disputes.
How do excess policies work with self-insured retention?
Excess policies start after the SIR is met. The insured handles claims up to the SIR amount. Then the excess policy covers costs above that. This setup can save money on premiums. It also gives the insured more control over smaller claims.
What does retention mean in insurance policies?
Retention in insurance is the amount of risk an insured keeps. It’s not covered by the policy. Self-insured retention is one form of this. Others include deductibles and co-payments. Retention helps lower premiums and gives insureds more control over their risk management.
