For larger more complex clients self-insuring can be a very effective means to enhance cash flow or insure parts of their operations that are difficult or very expensive in the traditional insurance market, but is not without risk.
One option for businesses with a strong balance sheet is to look at their own self retention capability. A self-insured retention (SIR) is a larger excess/deductible and can be used in conjunction with all classes of business that you presently purchase but are more effective with:-
- Motor Fleet
- Legal Liabilities
- Goods in Transit
- Property Damage
Designed correctly, an increased self-retention insurance programme can be an effective way to save time, expense, pound swapping between you and your insurer and ultimately long term reduction in claims cost and therefore the insurance premiums you pay.
A business chooses a self-insured retention because it has opted to retain some risk.
The business decides the amount of risk, in monetary terms, and the types of risks it wants to retain. It then creates a fund to pay losses that result from those risks. Here is an example.
The Barramundi Group is a large leisure group operating 300 hotels/bars across the United Kingdom. The group has experienced a large increase year on year in claims incidents and insurance premiums have increased x4 since 2014. Many claims are filed by guests who have sustained injuries in slip-and-fall accidents. Most claims have been small, but the group has incurred a few that exceeded £100,000.
The Barramundi Group is insured under a combined liability with a £5m limit of indemnity. The Group has elected to retain some losses in order to reduce the cost of its liability insurance. Thus, Barramundi’s liability policy includes a £200,000 self-insured retention. The firm has established a fund to pay liability claims. If a claim occurs, the hotel must pay damages up to the £200,000 retention amount.
If the damages exceed £200,000, Barramundi’s liability insurer will pay the remaining amount, up to the £5 million policy limit.
A self-insured retention can be an important part of an employer’s risk management plan. However, it is typically available only to mid-sized or large employers. Small employers don’t have the financial capacity to pay large losses out of pocket.
In this example the client was able to reduce their immediate insurance premium by £175,000 in year one – investing additional resource to risk management and claims management/reporting will help reduce the claims cost and future premium payments.
This is of course a simple example but demonstrates that there are alternative options available to the right client from the right broker. The business may be required to provide evidence of financial security, such as cash or a letter of credit.
There are other options that are available to clients. These can include:-
- Capping any one claim at a figure, let’s say £10,000 in this example – Aggregate Excess Programme
- Setting up an insurer (Captive) and arranging reinsurance – Captive Programme
Both of these are covered within our forthcoming Ascend White Paper – what level of self-insurance is right for me?
Benefits of a SIR
A SIR offers several benefits. First, it can provide significant savings on insurance premiums. Another advantage is greater control over the claims adjustment process. When a claim falls within the SIR, you can decide whether to settle it or contest it in court. Thirdly, you will have an incentive to control losses since you will be paying many of them using your own funds. Fourthly, your cash flow may improve. You’ll pay losses as they occur rather than paying for them in advance via insurance premiums.
All large insurance companies work with client firms that self-insure, including handling of the administrative costs and risk-sharing above the re-insured levels, for which they are paid a premium. Self-insurance, if properly used, can indeed be a cash savings technique, especially if the risk of a large loss is low – it takes time to do and it this may not be right for all clients.
To find out how we can help you consider this type of approach and how to change how you purchase insurance then please contact one of our consultants.