Understanding Self-Insured Retention: The Pros and Cons

Self-insured retention (SIR) is an insurance strategy that is becoming increasingly popular among businesses of all sizes. This strategy is used by companies to protect themselves against potential losses without having to pay expensive insurance premiums. In this article, we will explore what self-insured retention is, how it works, and the pros and cons of this approach.

What is Self-Insured Retention?

Self-insured retention is a risk management strategy where a business retains a portion of the risk by paying for claims out of pocket, up to a predetermined amount, before the insurance company starts paying. This predetermined amount is known as the self-insured retention amount or the deductible. Essentially, self-insured retention is a form of self-insurance.

How Does Self-Insured Retention Work?

When a company uses a self-insured retention strategy, they pay for losses out of pocket up to the SIR amount. Once that threshold is reached, the insurance company takes over and covers any additional losses that may occur. The SIR is often lower than a traditional insurance deductible, which is typically set at a higher amount. This allows companies to save on premium costs while still being protected against potential losses.

Pros of Self-Insured Retention

1. Lower Premium Costs: By using a self-insured retention strategy, companies can save on premium costs, which can be substantial. Insurance companies charge premiums based on the level of risk they are assuming. With a self-insured retention strategy, the insurance company is only responsible for covering losses above the SIR, which reduces the level of risk they are assuming, resulting in lower premiums for the business.

   
   

2. More Control Over Claims: With self-insured retention, the business has more control over the claims process. They can choose to handle claims in-house or outsource them to a third-party administrator. This can result in faster claims processing times and lower administrative costs.

   
   

3. Customizable Coverage: Self-insured retention strategies can be customized to fit the specific needs of the business. This allows businesses to choose the amount of coverage they need and the amount of risk they are willing to retain. This can result in more tailored coverage and lower costs.

   
   

Cons of Self-Insured Retention

1. Increased Risk: The most significant disadvantage of self-insured retention is that it increases the business's risk exposure. If a significant loss occurs, the business is responsible for covering the costs up to the SIR amount. This can be a significant financial burden for smaller businesses that may not have the financial resources to cover large losses.

   
   

2. Unpredictable Claims: Another disadvantage of self-insured retention is that claims can be unpredictable. While insurance companies have experience and expertise in predicting claims, businesses may not have the same level of expertise. This can result in unexpected costs and increased financial risk.

   
   

3. Administrative Burden: Self-insured retention requires more administrative work than traditional insurance policies. The business must keep accurate records of claims, manage the claims process, and handle any disputes that arise. This can be time-consuming and expensive.

Self-insured retention can be an effective risk management strategy for businesses of all sizes. By retaining a portion of the risk, businesses can save on premium costs while still being protected against potential losses. However, self-insured retention also increases the business's risk exposure, which can be a significant financial burden in the event of a large loss. Businesses considering a self-insured retention strategy should carefully weigh the pros and cons before making a decision.