Under an insurance policy which has a self-insured retention (SIR) provision, the insured is required to pay any claims costs arising from the SIR and then approach the insurer once the SIR is breached. These costs can include defence and indemnity claims. Consequently, the insured assumes the role that an insurance company would normally assume in the absence of a SIR by initially defending the claim itself.
This approach can suit both the insured and the insurer. Often an insured will have a much greater awareness of the circumstances surrounding the claim and its potential for liability, whereas an insurer may prefer to sit above lower cost frequency claims.
By contrast to the SIR approach, under a deductible plan, an insurer assumes liability and defence responsibility for a claim at day one. Upon conclusion of the claim, the insurer will simply invoice the insured for the appropriate deductible amount.
The SIR approach, therefore, suits larger companies that have the resource to defend and manage claims. By taking a proactive approach from an educated position, the outcomes can be improved and this, along with savings made from reduced claims handling costs to an insurer, can result in premium savings.
Although policies can vary, in general, a deductible plan will pay up to a certain amount including the deductible. Consequently, a policy which has a sum insured of $1m and a deductible of $100,000 will pay a maximum of $900,000 whereas by contrast were it to sit above a SIR of $100,000 then the maximum recoverable would be $1,000,000.
Repositioning of the Insurance Policy
When a SIR is utilised, the insurance policy elevates and sits above the SIR. In effect, the SIR is an insurance policy on its own. Consequently, the excess insurer has no obligation to pay or to defend a claim until the insured has paid the full amount of the SIR. A SIR is not what the insured owes the insurance company, but rather the threshold at which the insurer’s liability starts, even in the event of the bankruptcy of the Insured.
As shown above, under a deductible plan the excess insurer is responsible for paying and defending all claims whereas with a SIR the insured assumes responsibility at a primary level. Because the liability of an excess insurer which is sitting above a SIR can be impacted by decisions taken by the insured, it is common for reporting requirements to be imposed by the excess insurer that requires the insured to report any claims that have the potential to breach a certain threshold. These can not only be financial thresholds (such as 50% of the SIR) but also the types of claim such as types of bodily injury, which have the potential for significant claims to the excess insurer.
Should the insurer take over the claims management of a specific claim, then it is usual for the defence costs to be borne by the carrier and not by the SIR.
Should an insurer require that a Deductible or SIR is collateralised, it is more common for an escrow account to be used for a deductible and a letter of credit utilised for a SIR.
Read our guide to find out how under a self-insured retention plan, the insured performs many of the functions of an insurer by assuming responsibility for paying claims.
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