5 Factors Influencing an Excess Workers’ Compensation SIR Decision

When underwriting a policy for employers who self-insure, a carrier must decide what self-insured retention (SIR) can be offered, determining the amount of financial risk the insured must assume before their carrier will pay for losses. Some employers will have a general understanding of what that number may look like, but what goes into this decision-making process for a carrier?

“The financial risk is taken on an occurrence basis, so even when there are occurrences where multiple people are injured, the insured is only taking the same risk (the SIR) regardless of the number of people involved in the occurrence,” said Don Bedford, Vice President – Stand Alone Excess Workers’ Compensation Underwriting at Safety National. “Taking the first portion of every occurrence is a great way to lower premiums. Remember that the higher the SIR amount, the lower the premium total.”

There are several factors that influence the SIR decision. Among them are:

1. Financial Stability

An insured’s financial position is a critical component of determining the SIR. The more stable the organization’s financials, the more risk it can assume and the more premium it can save.

2. Company Size

When an organization is substantially larger, its losses become more predictable over time. As such, a sizeable company has a reduced chance of its financials being impacted by a more significant claim.

3. Financial Goals

If an insured is actively involved in expansion, acquisition, or other large capital expenditures, taking on a larger SIR may not be suitable for the time being. A year with a number of significant losses could hurt cash flow and jeopardize other corporate objectives.

4. Loss History

A SIR arrangement must be sensible for both the carrier and the insured. When an insured’s losses are consistently represented over time, an underwriter is better able to accurately determine an acceptable SIR for both the insured and carrier. If an insured has an inconsistent loss history, an underwriter is unlikely to offer a lower SIR.

5. Exposures

Although an insured may have an excellent loss history, some employers are more susceptible to significant losses than others. Insurance carriers are familiar with the performance of different industries and may be averse to offering lower retentions on classes of business that are more likely to experience substantial losses. There is usually a “sweet spot” of exposures, past performance, and other factors where a reasonable SIR can be found that satisfies both the insured and the carrier.

An Insured’s Role in Influencing the SIR Decision

Employers are not powerless in determining their SIR. There is always potential for flexibility, but it depends on how much risk an insured is willing to assume. Typically, an underwriter will allow an insured to take a higher SIR to achieve savings on their premium. However, there is a point in which those savings do not justify the additional risk to the insured.

The best chance of a lower SIR equates to a complete submission provided to the underwriter. This provides the underwriter with an in-depth understanding of an organization’s operations, making them more comfortable with offering a lower SIR. Employers should include the following in their submission:

• Commentary on any historically large losses and changes made to prevent them from occurring in the future
• Detailed explanations of company functions
• A list of all exposures, including aircraft, watercraft, and any new operations

Underwriters are aware of exposures in various industries and know the frequency and typical size of large losses in those respective industries. Even when an insured has not experienced significant losses in the past five years, it does not rule out the possibility of one happening in the future. When an underwriter is provided with an arsenal of information to better understand an insured’s operations, they may be able to offer a SIR that allows enough financial protection for the insured while enabling them to take risks and save premium costs.