A Self-Insured Retention (often referred to as a SIR) is the amount of risk that a Self-Insured company or group is prepared to retain for its own account. In other words, it is the point at which the excess, specific and aggregate or reinsurance cover applies and where the insurance risk passes from the Self-Insurer to a professional insurance or reinsurance company.
Calculating the amount that a company is responsible for paying out of its own account from a single or series of loss occurrences enables a Self-Insurer to calculate the maximum amount that it has at risk. The size of the Self- Insured Retention will vary depending on the size of the Self-Insurer but the following factors will need to be taken into consideration when determining what the Self-Insured Retention should be:
1.The Experience of the Self-Insurer
A new Self-Insurer will generally have less of an appetite for risk than a company or group that has been able to develop its own experience. Self-Insurers generally err on the side of caution in the initial stages of being Self-Insured. Often they will increase their Self-Insured Retention once they have achieved a certain level of comfort, experience and accuracy with regard to predicting claims.
2.The Size of the Company
A larger company with a stronger balance sheet will be able to assume more risk on an individual loss than a smaller company. Companies also need to be aware of the potential claims exposure from a series of losses. Aggregate insurance or reinsurance is generally available to provide a known maximum total potential loss from an unexpected series of individual claims. Larger companies are generally able to project what their losses will be with some degree of certainty since because of their size, they are less prone to fluctuation.
3.The Availability of Risk Transfer
Like all commercial insurance products, excess, specific and aggregate or reinsurance coverage is influenced by market forces and in some circumstances an insurer will insist on a minimum amount at risk per claim and series of claims.
For example: a stop-loss carrier providing specific and aggregate coverage to employee benefit plans might insist upon a minimum specific SIR of $100,000 and a minimum aggregate attachment point of 125% of estimated losses rather than 110% which may been available in the past. Consequently, whilst a self-insurer may wish to assume less risk, its insurers may require it to retain a higher minimum amount.
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