Deductibles and Self-Insured Retentions (SIR) in liability insurance serve the same purpose: They can offer a cost savings to an insured who anticipates small and infrequent losses, and they can reduce an insurer’s reluctance to write an account with a loss frequency problem.
The fundamental difference between a deductible and a SIR is how the claims are adjusted. With a deductible approach, the insurer adjusts all claims, and then bills the insured for his deductible amount. Wtih an SIR approach, the insured is responsible himself for adjusting claims up to his SIR, which means that the insured will probably require the services of a third-party administrator (TPA). After the SIR is consumed, then the inurance carrier is brought in to handle the remaining amounts of the claim.
Not only do deductibles and SIRs differ in claims adjustment approach, there are usually other differences, so making an "apples-to-apples" comparison can require soem additonal research.
Here are some key factors to be aware of:
1. Loss Adjustment Expense (LAE). Some insurers using deductibles or SIRs apply the deductible or SIR amount only to the actual claim itself (BI/PD), while others also include LAE. This is often noted in the quote as "LAE inside" or "LAE outside." This is the same concept as "defense inside" or "defense outside."
2. Per Claim/Per Occurrence. Another variable is whether the deductible or SIR apply per claim, or per occurrence. Obviously, this could make a huge difference to the insured, depending on the circumstances of a particular loss. A per claim deductible or SIR would produce a lower premium quote, since the insured has assumed more of the potential loss, but the insured could face a considerable amount of up-front expenses.
3. Third Party Administrator (TPA). If an SIR is used, the insured will need a TPA to assist with the claims adjustment process. The insurer will usually provide an approved list of TPAs that the insured can use. The TPA will review the insured’s loss runs, as well as consider the nature of the insured’s business, and provide a cost per claim pricing. In some cases, the TPA will also require a deposit at policy inception.
4. Appeal of deductible vs. SIR. As you noted in your question, some insurers prefer a deductible approach, some prefer the SIR, some offer both, and some don’t offer either. One difference between the two that insurers often like is that with an SIR, the insured "has some skin in the game." That is, there is an incentive for good loss control, since the insured must pay up front for claims (and often LAE also) which are below the SIR. With a deductible, the insurer pays the money first, but has to bill the insured for their contribution, which can produce a delay in the insurer receiving reimbursement from the insured.
Feel free to hit me with any other questions as well.
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Jonathan S. Carroll, ASLI, CRIS
Bradley & Parker
320 S. Service Rd, Melville, NY 11747
O - (631) 981-7600
D - (631) 650-4034
C - (917) 376-0075
F - (631) 981-7681
