It may seem the only way to reduce insurance premiums is by reducing coverage, potentially exposing your company to disaster in the case of major liability. However, there are ways to reduce your costs without eroding protection, such as by creating a self-insured retention (SIR) managed by third party administration (TPA) services.
What Is Self-Insured Retention?
Under an SIR, your company assumes some of the liability your insurance company is responsible for now, and the insurance company lowers premiums accordingly. For example, you might decide to carry the first $1 million of liability and have the insurance company take over only if claims exceed that amount. Actuarial services calculate how much money your business needs to put aside into a trust fund to pay for your share of anticipated expenses.
If this sounds like a deductible, that is because SIRs and deductibles are very similar. The biggest difference is when you have a deductible your insurance company pays the entire claim and then comes to you for reimbursement of the deductible. When working with an SIR, you pay claims which fall under the SIR directly to the claimant and the insurance company doesn’t get involved until expenses exceed the SIR limit. An SIR scenario also gives the self insured entity greater control over the defense, handling and disposition of claims within the SIR.
How To Set Up An SIR Plan
Once you have an SIR set up, your company needs to put aside money to cover anticipated expenses. However, just because you have a $1 million SIR doesn’t mean you need a $1 million trust fund. Instead, you use actuarial services to estimate how much your expenses will be, how large the trust needs to be, and how quickly it needs to be funded.
Actuarial services assess the probability and amount of loss under the plan based on historical data. The calculations look at factors such as your industry, your geographical region and other relevant facts and of course, your claims history. For example, if insuring your company’s delivery fleet against collision, the more miles driven each year, the greater the chance of collision loss, and the larger your SIR trust fund needs to be.
Should You Use Internal Administration Or TPA Services?
Another decision to make about your SIR plan is whether claims against the plan will be handled by your own company or contracted out to TPA services. While an internal department might seem to be the less expensive choice, administering insurance claims is complicated and specialized. An inexperienced staff can overpay claims, pay claims that should be denied, or make mistakes that increase rather than decrease your organization’s liability.
Most companies find the better choice is to use experienced TPA services. These organizations have levels of knowledge and skill which can come only from years of experience in the claims management business. Trained professionals process claims more quickly and accurately than most company’s internal claim departments can, and this makes them more affordable choices in the long run.
SIRs give large companies a way to control insurance costs and expenses. When administered with the help of experienced actuarial services and TPA services, the plans can be created quickly and run affordably while yielding the desired results.