The Pros and Cons of Self-Insured Retentions
Defence of Smaller Claims and Reduced Premiums
By removing the responsibility for the settlement of smaller claims from the insurance company, claims and consequently premiums can be reduced. If claims are well managed and preventative measures introduced as a result of the insured being at risk, the objective is that the cost of managing the SIR is less than the amount of premium saved.
Increased Policy Limits
Since the insurance sits above the SIR, the equivalent sum insured is greater as a deductible is not deducted from the sum insured.
Increased awareness of exposures
Assuming awareness at first hand of claims and the costs of handling them should translate into an increased awareness of the exposures facing a company. Once these are analysed, loss control and preventative measures can be introduced. These can have a beneficial impact by reducing future claims.
Disadvantages of Self-Insured Retentions
The Cost of Administering Claims
Since the insured is responsible for paying and settling claims within the SIR, it is possible that unforeseen frequencies will lead to greater claims handling costs.
The Cost of Claims Handling
Unforeseen frequencies can also lead to higher claims costs arising from a higher number than projected claims falling within the SIR. Companies adopting a SIR often purchase aggregate protection to protect themselves in this scenario. However, the premiums paid for these protections will reflect past experience and may increase for poor performance.
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