What Is Self Retention Insurance and How Does It Work

Self retention insurance is a type of insurance that allows policyholders to retain a portion of their claims costs, rather than paying them out in full. This can be a cost-effective option for businesses and individuals who want to manage their risk and reduce their insurance premiums.

Self retention insurance works by requiring policyholders to pay a portion of their claims costs themselves, usually up to a certain limit. For example, if a policyholder has a $10,000 claim, they may be required to pay the first $5,000 themselves, and the insurance company will cover the remaining $5,000.

Policyholders can choose their own self retention level, which can vary depending on their individual circumstances and risk tolerance. This means they can customize their insurance coverage to suit their needs and budget.

Self retention insurance is a type of insurance where the policyholder keeps a portion of the claim amount themselves, rather than having the insurance company cover it entirely.

This approach can be beneficial for policyholders who want to maintain control over their claims and avoid the hassle of dealing with insurance companies.

Self retention insurance typically requires policyholders to pay a lower premium, as they are taking on more of the risk themselves.

By retaining a portion of the claim amount, policyholders can also avoid the potential for insurance companies to deny or delay payments.

Self retention insurance is often used in conjunction with other insurance policies, such as liability insurance or property insurance.

It's worth noting that self retention insurance may not be suitable for everyone, as it requires policyholders to have a certain level of financial stability and risk tolerance.

Policyholders who choose self retention insurance must be prepared to pay out of pocket for a portion of their claims, which can be a significant financial burden.

A SIR policy is a type of insurance policy where the insured party agrees to pay a specified amount of losses out of pocket before the insurance company begins to pay.

The main difference between a SIR policy and a deductible is that with a deductible, the insurer handles claims and bills up to the deductible amount, while with a SIR policy, the insured party handles all claims and payouts until the SIR limit is reached.

Here's a summary of the key differences between SIRs and deductibles:

A SIR policy is a type of insurance policy that's different from deductibles. With a SIR policy, the insured pays up to the SIR and the cost of defense, and the insurance company only kicks in when the SIR limit is reached.

The SIR limit is a specific dollar amount that the insured party is responsible for paying out in claims up to that limit. After the insured reaches the upper limit of the SIR, the insurance company will start to handle and pay claims.

The idea behind a SIR policy is to incentivize the insured to manage risks and avoid paying out-of-pocket for claims if possible. This is because the insured has "skin in the game" and will likely have better risk management.

Here are some key differences between a SIR and a deductible:

Overall, a SIR policy is a more complex and flexible type of insurance policy that can provide more control over insurance costs, but also requires the insured to have the financial resources to cover losses up to the retention amount.

The benefits of a SIR policy can be significant, but it's essential to understand the potential drawbacks. A SIR policy can provide a short-term reduction in insurance premium, but the longer-term exposure is to defense costs and settlement expenses under the SIR provisions.

Negotiating a SIR policy with the insurer is crucial, as it allows companies to find the best balance between policy costs and risk management. Companies can structure SIRs to cover specific projects, regions, or divisions, and even have an aggregate SIR limit and a per-occurrence SIR limit.

Self-insured retention can provide more control over insurance costs, but it requires the insured party to have the financial resources to cover losses up to the retention amount. This can be a significant burden for smaller companies.

Companies can work with the carrier to structure SIRs during the underwriting process, and it's essential to maintain the SIR to handle claims, reporting, and record-keeping. This can be done by having administrative staff stay on top of these tasks or hiring a TPA to manage the paperwork.

The insurance market has seen recent changes and tightening due to weather events and economic factors, which can affect the pricing of policies with SIRs. Construction companies need to be aware of these trends and work with experienced insurance brokers to negotiate an appropriate policy.

Construction companies can negotiate their policy and SIR limits with the insurer to find the best balance, and SIRs allow GCs more control over minor claims. The details of the policy matter, and negotiating pricing, what types of losses are covered, and whether the defense of claims is inside or outside the limits can help align the insurance with a company's needs.

Step-in rights are often exercised to keep losses below the SIR threshold. This is a common strategy to manage risk and prevent significant financial losses.

Companies may procure other insurance to cover SIR exposure. This can provide an extra layer of protection and peace of mind.

Laying off SIR exposure with indemnity agreements with partners or subcontractors is another approach. This can help distribute the risk and reduce the burden on one company.

A SIR policy can be a great way to reduce your insurance premium in the short term, but it's essential to understand the long-term implications.

The cost of defense and settlement expenses under the SIR provisions can mount up over time, and you'll need to pay for these expenses out of pocket.

With a SIR policy, you'll have control over expenditures within the SIR limit, subject to reporting requirements, which can incentivize you to manage risks and avoid paying out-of-pocket for claims.

However, the insurance company will only start to handle and pay claims after the SIR limit is exhausted, which can leave you exposed to significant costs.

Here are some key differences between a deductible and an SIR policy:

It's crucial to understand these differences and choose the right policy for your business needs.

As you navigate the world of SIR policies, it's essential to understand the importance of reporting and record-keeping. You'll need to track any losses you pay out, and report them to the insurance company if you reach your SIR limit.

Insurance companies require accurate records to ensure that all reported amounts conform to the policy terms. This means keeping track of every payout and related expense, no matter how small.

A third-party administrator (TPA) can be hired to handle claims against the SIR, taking some of the burden off your shoulders. This can be especially helpful if you're dealing with a large number of claims.

Insurers have specific reporting requirements, such as reporting claims over a certain amount or when a certain percentage of the SIR is reached. For example, a policy might require reporting for any single claim over $25,000 or when the insured reaches 50% of the SIR in more minor claims.

You'll need to have records to show the details for all payouts and related expenses, including costs like repairs or replacements. This can be a challenge, but it's essential for ensuring that your insurance company covers the costs you're entitled to.

Carriers may also require insureds to report annual SIR spend, which helps determine when the insurance company will step in and start covering claims. Once the SIR is exhausted, the carrier will begin to pay the first dollar, so it's crucial to keep track of your spending.

In the event of a catastrophic loss, even if the initial claim isn't over the SIR limits, it's likely to grow due to the nature of the loss. This is why accurate reporting and record-keeping are so critical – they help ensure that you're prepared for any unexpected expenses.