Limiting Risk through the Self-Insured Retention

Self-Insurers are normally unable to accept responsibility for all losses as they could face financial ruin from adverse experience. Consequently insurance and reinsurance programs can be purchased with retentions, being the amount that a company keeps for its own account, set according to each company's appetite for risk.

A Self-Insured Retention, or S.I.R. as it is commonly known as, is the amount of risk that a company is prepared to retain for its own account. In other words it is the point at which the specific excess insurance applies and the risk passes from the self-insurer to a professional insurer.

Calculating the amount that a company stands to lose from a single or series of loss occurrences enables a self-insurer to calculate the maximum amount that it stands to lose and The size of the SIR will naturally vary depending on the size of the self-insurer but the following factors will need to be taken into consideration when determining what a SIR should be.

(i) The Experience of Self-Insurer

A new self-insurer will generally have less of an appetite for risk than a company that has been able to build up some experience. Self-Insurers generally err on the side of caution in the initial stages and increase their SIRs once they have achieved a certain level of comfort.

(ii) The Size of Company

Naturally a larger company will be able to assume more risk than a smaller company. Companies need to be aware of the potential exposure to a series of losses however aggregate insurance is generally available to provide a known maximum potential loss. Larger companies are generally able to project what their losses will be with some degree of certainty as due to their size they are prone to less fluctuation.

(iii) The Availability of Insurance and Reinsurance

Like all commercial insurance products, excess or specific and aggregate insurance coverage is prone to market forces and in some circumstances an insurer will insist on minimum retentions. For example a stop-loss carrier providing specific and aggregate coverage to employee benefit plans might insist upon a minimum specific SIR of $25,000 and a minimum aggregate attachment point of 125% of estimated losses rather than 110% which has been available in the past. Consequently whilst a self-insurer may wish to assume less risk its insurers will require it to take a minimum amount.