Public entities across the nation must professionally manage the numerous required services that communities demand. Such services are expensive to operate and, in recent tight budget years, entities are often forced to make difficult decisions on how to maintain essential services while cutting back on operational expenses.
One option that public entities frequently consider is to lower insurance costs by assuming more risk. This can be accomplished by moving insurance contracts from a deductible program to a seemingly more attractive self-insured retention program (SIR), which lowers an entity’s up-front insurance premiums. But before jumping into an SIR, there are some issues and long-term expenses that entities should first consider.
Administration of Claims
Under a standard first-dollar or deductible program, the insurance carrier is responsible for the administration of all claims, including the denial of claims to constituents. Under an SIR program, the entity is responsible for all claims administration. Public entities can choose to either self-administer claims or hire a qualified third-party administrator (TPA).
In a self-administration model, entities must handle all claims needs. This means employing internal claims management standards and expectations, including oversight of external vendors, experts and services, and providing system support, such as a claims management system. Similarly, qualified personnel must be available to work the claims within an SIR. Before switching, a thorough analysis of an entity’s typical claim counts in the proposed self-insured retention layer will help determine staffing needs.
Moving directly from a deductible program to self-administration can be difficult. While it allows an entity more control, it is advised that only experienced claims management departments consider it.
Third-Party Administrator Model
Electing to hire a qualified TPA may be a better alternative. This choice allows an entity to attain the efficiencies of claims management processes, systems and personnel with little effort. However, there are additional considerations. Entities must determine the roles and responsibilities of the TPA. Will the TPA be responsible for claims until closed, which is typically more costly, or will the TPA only be responsible for claims while under contract with the entity? While the latter scenario may be more affordable up front, when you dissolve the contract with that TPA, it is no longer responsible for handling claims, even those in progress. Transferring claims files and bringing new handlers up to speed can be a setback, prove costly and lead to the mishandling of open claims.
Escalation of Claims to Excess Carriers
Claims handled below the SIR attachment can turn into much larger claims down the road. This means an excess carrier would need to be involved in the claim. Thoroughly understanding the reporting requirements of an excess insurance company can be complex, as not all companies have standard wording. What may constitute the need to notify the excess carrier of a claim or knowledge of an event, which may result in a claim, will vary widely. By failing to report an incident or claim, an excess carrier could deny coverage. Therefore when an entity moves to an SIR, the process it adopts regarding reporting of claims and incidents to carriers should be very aggressive, as it can save the entity a lot of money down the road.
Funding SIR Losses
Once the claim-handling hurdles are cleared, an additional consideration entities should acknowledge before moving to an SIR program is the funding of losses within the SIR level. An entity must have adequate reserve funds to pay all claims during the first year and a plan for paying future claims.
Analysis of the entity’s claims frequency and severity will help determine the proper funding level. An unexpected increase in claims frequency will adversely affect the entity’s reserve fund and could prove even more costly than paying the higher deductible premiums.
In addition, there must be a level of commitment and discipline to grow the reserve fund over time, which garners even more financial flexibility for higher SIR levels in the future. Using the reserve fund for other services in tight financial years will undermine the entity’s ability to pay claims.
By thoroughly understanding the claims management, reporting requirements and funding requirements associated with moving to an SIR from a deductible program, public entities can effectively evaluate the true cost and benefit of making this structural change to their insurance programs.