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What Is Self Insured Retention?
When it comes to managing risk, businesses have several options, including purchasing insurance policies to transfer the risk to an insurance company. However, there is another alternative known as self-insured retention (SIR). Self-insured retention is a risk management strategy where a company assumes a certain level of risk before their insurance coverage kicks in. In this article, we will explore what self-insured retention is, how it works, and its benefits and drawbacks.
How Does Self Insured Retention Work?
Self-insured retention is commonly used in commercial insurance policies, particularly in the areas of general liability, workers’ compensation, and professional liability. When a company chooses self-insured retention, they agree to pay a predetermined amount of money for each claim before their insurance coverage begins. This amount is known as the self-insured retention amount.
For example, let’s say a company has a self-insured retention of $50,000 for general liability claims. If a claim arises that is covered by their insurance policy and the claim amount is $100,000, the company would be responsible for paying the first $50,000, and the insurance company would cover the remaining $50,000.
Benefits of Self Insured Retention
Self-insured retention offers several benefits to businesses:
- Cost Savings: By assuming a portion of the risk, companies can potentially save on insurance premiums. With self-insured retention, businesses only pay for claims that exceed the retention amount.
- Increased Control: Self-insured retention allows companies to have more control over their claims process. They can choose their own claims adjusters and have a direct say in the settlement negotiations.
- Flexibility: Self-insured retention provides flexibility in tailoring insurance coverage to the specific needs of the business. Companies can choose the retention amount that aligns with their risk tolerance and financial capabilities.
Drawbacks of Self Insured Retention
While self-insured retention has its advantages, there are also some drawbacks to consider:
- Financial Risk: Companies that choose self-insured retention bear a higher level of financial risk. If a significant claim arises, the company must have sufficient funds to cover the retention amount.
- Administrative Burden: Managing self-insured retention requires additional administrative work. Companies need to establish claims management processes, hire or train claims adjusters, and maintain accurate records.
- Limited Coverage: Self-insured retention only covers claims that exceed the retention amount. If a claim falls below the retention, the company is responsible for the entire cost.
Case Study: Company XYZ
To illustrate the concept of self-insured retention, let’s consider a case study of Company XYZ, a manufacturing company with a self-insured retention policy for workers’ compensation claims.
Company XYZ has a self-insured retention of $100,000 for workers’ compensation claims. If an employee sustains an injury at work and files a claim, the company would be responsible for paying the first $100,000 of medical expenses and lost wages. If the claim exceeds $100,000, the insurance company would cover the remaining amount.
In this case, Company XYZ benefits from cost savings on insurance premiums, increased control over the claims process, and the flexibility to tailor their coverage to their specific needs. However, they also face the financial risk of having to pay the self-insured retention amount for each claim.
Frequently Asked Questions (FAQ)
1. What is the difference between self-insured retention and a deductible?
While self-insured retention and deductibles are similar concepts, there is a key difference. With a deductible, the insurance company pays the remaining amount after the deductible is met. In contrast, with self-insured retention, the company is responsible for paying the retention amount before the insurance coverage begins.
2. How do companies determine the self-insured retention amount?
The self-insured retention amount is determined based on the company’s risk tolerance, financial capabilities, and the specific insurance policy. Companies may consult with insurance brokers or risk management professionals to determine the appropriate retention amount.
3. Can self-insured retention be used for all types of insurance?
Self-insured retention is commonly used in commercial insurance policies, particularly for general liability, workers’ compensation, and professional liability. However, it may not be available or suitable for all types of insurance coverage.
4. Are there any legal requirements for self-insured retention?
The legal requirements for self-insured retention vary by jurisdiction and the type of insurance coverage. Companies should consult with legal counsel and insurance professionals to ensure compliance with applicable laws and regulations.
5. Can self-insured retention be combined with other risk management strategies?
Absolutely! Self-insured retention can be combined with other risk management strategies, such as purchasing excess insurance coverage to protect against catastrophic losses that exceed the retention amount.
6. Is self-insured retention suitable for small businesses?
Self-insured retention can be suitable for small businesses, but it requires careful consideration of their financial capabilities and risk tolerance. Small businesses may choose to work with insurance brokers or risk management professionals to assess the feasibility and potential benefits of self-insured retention.
Self-insured retention is a risk management strategy where a company assumes a certain level of risk before their insurance coverage kicks in. It offers benefits such as cost savings, increased control, and flexibility in tailoring insurance coverage. However, it also comes with drawbacks, including financial risk and administrative burden. Companies need to carefully evaluate their risk tolerance and financial capabilities before deciding to implement self-insured retention. By understanding the concept and weighing the pros and cons, businesses can make informed decisions to effectively manage their risks.