Article

Understanding Self-insured retentions (SIR) and deductibles is critical for both standard insurance placements, and captive arrangements. Both mechanisms can allow businesses to lower premiums by assuming a portion of risk, but they operate in fundamentally different ways, with implications for cash flow, control, and long-term financial outcomes.

The Payment Timeline: Who Pays First?

With a self-insured retention, the insured bears full responsibility for covering claims up to the SIR limit before the insurer contributes. For example, in a $200,000 claim with a $50,000 SIR, the insured pays the first $50,000 directly, and the insurer covers the remaining $150,000. This contrasts sharply with a deductible, where the insurer pays the entire claim upfront (e.g., $200,000) and later seeks reimbursement from the insured for the deductible amount ($50,000). This difference in payment timing impacts cash flow: SIR requires immediate liquidity, while deductibles allow deferred reimbursement.

Defense Responsibilities and Control

Under an SIR, the insured typically manages defense costs and claim resolution until the retention limit is reached. This grants businesses greater control over legal strategies and settlements, which is particularly advantageous for organizations with specialized risk expertise. In contrast, deductibles place defense obligations entirely on the insurer from the outset, reducing the insured’s direct influence over claim handling. For captives, which thrive on retained underwriting profit, the SIR model aligns with their goal of maximizing control over risk outcomes.

Coverage Limits and Collateral Requirements

An SIR typically does not erode the policy’s coverage limits. If a policy has a $1 million limit and a $50,000 SIR, the full $1 million remains available after the SIR is exhausted. Deductibles, however, typically reduce the total coverage. A $1 million policy with a $50,000 deductible effectively provides only $950,000 in coverage. 

Strategic Implications for Captive Insurance

Captives frequently favor SIR structures because they allow businesses to maintain oversight of claims processes within the SIR, enabling faster resolution and cost mitigation. In a fronted arrangement, carriers will also often favor an SIR as they have less concern of seeking reimbursement of the deductible payment after the claim has been paid.

While captives provide additional control over claims, potential for underwriting profit, and the ability to provide custom coverage, an SIR often simplifies the arrangement and allows for additional control within the SIR layer without the fronting carrier needing to be involved and seeking reimbursement of the deductible after the claim has been paid. Working with a sophisticated broker that understands both use cases will be crucial in the decision making process between retention options. C.I. works directly with your broker to ensure all options are considered and the most effective structure is utilized.