Often, the terms “self-insured retentions (SIRs)” and “deductible” are used interchangeably. Ultimately, both are tools for the insured to assume a portion of the claim cost. Although they are designed to achieve the same goals, there is one significant distinction — the responsibility for the payment of losses, including defense costs, within the SIR/deductible. State regulators must make sure there is a responsible party with the resources to pay for all benefits due.
“Self-insurance and large deductible insurance each have advantages, so it depends on an insured’s needs. To be self-insured, an insured will have to go to each state in which they operate to seek approval,” said Curt Reno, Senior Vice President of Insurance Underwriting at Safety National. “There can be cost savings by handling the process independently if they have those capabilities. With a large deductible, the insured does not have to approach each state because the carrier is responsible for that process, but there is an administrative cost.”
Why Choose Self-Insurance?
Perhaps the most common reason companies choose self-insurance is the savings component. It is an attractive option because it allows the insured to have some control when it comes to their expenses.
Self-insurance is often the most advantageous from a cost basis, but that advantage includes an added requirement. In addition to obtaining approval from each state to self-insure, the regulators must verify that the employer can pay their claims. States may have different requirements on how the employer can prove financial responsibility. The challenge is when an organization has operations in several states, administering the program can be very complex due to variances in state regulations.
When is a Deductible Plan Best?
Entities that choose deductible products do not need to file with each state for approval. It is the carrier’s responsibility to complete filings with states. While the cost of risk is similar between self-insurance and large deductible, the main differentiator is the responsible party.
The carrier is ultimately responsible for paying the benefits in a deductible product. The insured is then responsible for reimbursing the carrier for any losses within the deductible. Because of this, the insurance carrier will usually require the insured to provide collateral or a letter of credit to ensure they will be reimbursed for any amounts below the deductible. Specific requirements may vary, but generally, the employer only needs to demonstrate financial responsibility and deliver collateral to the carrier instead of doing so for workers’ compensation regulators from a multitude of states.
While the two programs are similar in that they provide a large employer with cost savings and better control, the differences in responsibility for administering the program needs to be considered to determine what works best for an individual insured. Also, if an insured operates in multiple states, they can choose to self-insure in some states and purchase a large deductible product in others.