Liability insurance: deductibles vs self insured retentions

[jerrytuttle]

For a primary liability insurance policy, the rule of thumb as I understand it is that:

1. a deductible reduces the limits of the insurance policy, and
2. a self insured retention does not reduce the limits.

So for example, for a policy with a 1 million limit of liability:

1. a 100,000 deductible leaves the insured with 900,000 of insured limits, and

2. a 100,000 SIR still gives the insured 1 million of insured limits.

This is supposed to be a rule of thumb, not absolute.

My questions are:

1. is the above accurate?
2. does someone have sample endorsements that detail the above that they would be willing to fax to me? fax 212/238-9633.

Thank you,
Jerry

[TwistedMentat]

For a primary liability insurance policy, the rule of thumb as I understand it is that:

1. a deductible reduces the limits of the insurance policy, and
2. a self insured retention does not reduce the limits.

So for example, for a policy with a 1 million limit of liability:

1. a 100,000 deductible leaves the insured with 900,000 of insured limits, and

2. a 100,000 SIR still gives the insured 1 million of insured limits.

This is supposed to be a rule of thumb, not absolute.

My questions are:

1. is the above accurate?
2. does someone have sample endorsements that detail the above that they would be willing to fax to me? fax 212/238-9633.

Thank you,
JerryJerry, don't have any paper to send you, but your description matches the practice with which I am familiar. Beyond the limits, other practical differences are:
1) LAE - typically incurred for losses under deductible but not for losses under SIR.
2) Credit risk/security - considered for deductible policy, but not for SIR.

[Mary Frances]

Jerry, I could be completely wrong on this, but I think you are right on how much limit there is (including the deductible or excess of the SIR). I think the big difference, though, is what is actually covered by the insurance policy. In the case of a deductible, the insurer is covering a ground up loss and then collecting the deductible back from the insured. With an SIR, the insurer is providing coverage only for losses that exceed the SIR. If the insurer is also the TPA, there might not be any effective difference in most cases, but consider the situation where the insured goes bankrupt and there isn't enough money in the loss fund/LOC to cover everything. In the deductible case, the insurer has to pay the losses and then is a creditor of the insured to try to get back the deductibles. If the insurer is excess over an SIR, though, it only has to pay on the claims excess of the SIR. In the case of a workers comp policy, injured workers in the deductible case would be paid by the insurer and unaffected by the insured's bankruptcy. With the SIR, the injured worker would be transferred to the self-insurance guarantee fund (assuming the State has one - I'm not sure they all do).

[jerrytuttle]

Hi,

I don't disagree with the discussion above.

My interest in deductibles and SIRs is more in the pricing of increased limits, when the policy is already subject to a deductible or SIR. Further, as a reinsurer reinsuring an excess layer of such policies, I am trying to understand how the primary policies are priced.

I think there is the potential for me to be dealing with an understated premium base in the deductible case here. For example, I want the same dollars of premium for 1M xs 1M whether there is a deductible or not - I am not further removed from loss - but the premium base has been credited for a deductible on the basic limit.

[Mary Frances]

You got that right. Deductible policies are priced net of the deductible - results in a huge savings in premium taxes sometimes. In fact, in Florida a deductible is much better than an SIR because there's a big tax on self-insurers but premium taxes only apply to the premiums, which are net of deductibles.

So if you want 1m x 1m where there's an underlying deductible, you are going to have to account for the "missing" premium. The cedant's premiums are really going to be something like 750 x 250 on average. Good luck.

Can you get access to what they are requiring for loss funds for the deductible? Would that work as a proxy for the deductible premiums?

mf