Self-Insured Retention—A Practical Perspective
Motivating Factors for Establishing a SIR Program
August 2005
This article is written by Mr. Thomas M. Ryan, AIC. Mr. Ryan is a casualty general adjuster with GAB Robins North America. Mr. Ryan handles claims from the following fields: general and product liability, personal auto and homeowner's liability, and employee dishonesty. He is an active member of the Cincinnati and Dayton, Ohio Claims Associations and is a continuing education instructor for the Cincinnati Insurance Board, and a casualty/workers compensation instructor at the National Education Center .
Introduction
When I started as a casualty adjuster with GAB Robins North America, Inc. (then known as GAB Business Services) in 1978, very few commercial businesses, or their brokers, had truly considered the cost-savings and overall benefits of carrying a “per claim liability deductible”, and only having a traditional insurance policy for claims exceeding that specified amount. In their defense, since the claims and litigation related to our tort system were smaller in number and scope than today, the environment arguably did not warrant the use of various types of such strategies. While terminology and policy language may differ, these plans typically allow the insured to have a direct say in how claims are handled as opposed to turning over all decision power to an insurance company, whose philosophy and approach to claims may not be the same.
Since most of my company's work as an independent adjusting firm is for insurance companies, my experience in the self-insured industry has given me a unique perspective on both traditional and non-traditional insurance programs. Sometimes the same type of claim for different entities has required different handling instructions. Many of us in the industry sometimes forget that the general public may have difficulty understanding this concept. My explanation is that both traditional and self-insurance programs are designed to try to prevent lawsuits in the first place and are mirror images of the way that the legal process is supposed to work. However, human nature brings elements of unpredictability and emotional considerations, which are required to be factored into the process.
Need for Claims-Handling Process
On liability claims that I handle for either insured or self-insured entities, I usually tell clients that my job as the adjuster is to try to reduce the risk of people suing them and to try and protect their business, or personal assets in the process. After assessing the circumstances, I indicate whether I believe a claim should be paid, denied, or compromised. Most people truly don't understand that the best insurance plan is one that is never used and/or appreciate the protection that an individually tailored program affords.
Since most consumers do not truly understand the legal process, the fact that they would have to become involved in day-to-day claims handling could be a major drawback to the use of a Self-Insured Retention (SIR) Program. For example, it is a formidable task to deal with upset, and often irate, individuals who want money and claim special legal damages to have their cars repaired, obtain rental cars and reimburse their medical bills and wage loss that are legitimately due to an auto accident. However, it is even more trying and complex when one must consider payments of intangible amounts for the physical and emotional damages, especially since there is no set formula to calculate these general legal damages. Again, it is basic human nature to want another to handle the total responsibility, and those who do handle the situation are sometimes criticized—even if the results are reasonable and provide a possible cost/liability saving given potential future action.
In order for a SIR pooling program to be effective, insureds must understand fully the concepts and procedures involved—they cannot just get their feet wet! Since the claims process is adversarial by nature, people perceive damages differently, if caused by someone else. As a result, claimants simply want their compensation immediately, regardless of whether it is a small, or large, amount of money, even if there are serious liability issues to be taken into consideration. One strategy to efficiently handle any liability claim is to resolve it promptly, especially if there are injuries involved, since its perceived value never goes down over time. The “ostrich-approach” to settling these types of claims has never been successful in my experience. While I cannot prove it statistically, I believe that many demands for settlement of soft-tissue bodily injury claims become exaggerated due to a protracted related property damages claim, especially if there are initial delays in being contacted and getting the process started. It is probably no coincidence that an attorney's initial letter of representation is often received immediately upon the eventual conclusion of the property damage claim.
Motivations for SIR Program
Most SIR accounts that I have handled seemed to be initially motivated by the customer's dissatisfaction with the lack of prompt response to a claim under a traditional insurance program. While individuals would not normally be pestered by a claimant or threatened with media exposure, the same is not true for a business entity. Every local television station now has a local troubleshooter, who loves to publicize a story involving the poor, unsophisticated “David” consumer being ignored, or taken advantage of, by the “Goliath” business or insurance industry. To avoid this issue, insureds can hire their own claims staff or use independent adjustment companies to act as their third-party administrators (TPAs). In this manner, it is much easier for the customer to make certain that claimants are contacted immediately and treated professionally since it is much easier to change internal staff, or outside companies than to find alternate excess carriers in such a specialized market.
Another motivating factor for establishing a SIR program is the ability to directly affect the bottom-line insurance costs through pro-active safety and loss control programs. Under a traditional insurance program, rates are determined based on general industry and numerous other factors over which insureds exert no direct control. Since umbrella carriers will base rates on the customer's loss history, any consistent reduction strategies used to address claims will hopefully be economically beneficial in the future. Once again, brokers need to remind corporate clients that the best umbrella program is one that never requires the carrier's direct involvement, but has sufficient limits to handle any potential exposure. To quote Teddy Roosevelt's famous words, umbrella insurance carriers should, “Walk softly but carry a big stick!”
Once a commercial entity utilizes a SIR plan, it is my experience that it normally does not go back to a traditional insurance program and usually increases the retention amount. For example, I initially started handling claims for a local company, which had a $5,000 per claim retention level that increased to $500,000 over a five-year period, and had a ten-year period without a single claim being referred to the umbrella carrier. Since the client's public image was a major concern, immediate contact and professional, courteous treatment to all parties involved in an accident were major requirements; this prompted claims to be settled (paid or denied) in an expeditious manner. More importantly, claims involving intentional acts of employees, or other situations that may be excluded under a traditional policy, could be paid. Additionally, no-liability claims could be paid out of concern for adverse publicity or customer relations—which may not be viewed in the same manner by an insurance company's representative.
Conclusion
In summary, self-insured retention programs may be ideal for companies that are concerned about:
1. Protecting their corporate assets in the event of a major loss or other catastrophic event;
2. Understanding how their claims are handled on a daily basis;
3. Managing risk management issues by becoming directly involved in the claims process;
4. Upholding their public image, especially in the local community; and
5. Controlling their overall risk-related costs.
In order for the loss control puzzle to be complete, corporate clients must realize that they are the cornerstone piece, which must be perfectly aligned with brokers, umbrella carriers, and/or third-party administrators. If all the pieces truly work together with a common goal, the individual connecting lines will eventually fade and hopefully create a solid picture of financial security.