I guess you can think of it as a deductible with different terminologies. But there are some small differences.
Let's say an insured has a $100K SIR/Deductible and a 1M liability policy.
Under a SIR:
If a claim is $80,000, the insured pays the full amount, and the insurer does nothing.
If a claim is $250,000, the insured pays $100,000 (SIR), and the insurer covers $150,000.
Under a deductible:
If a claim is $50,000, the insurer pays $50,000 to the claimant, then bills the insured for $50,000.
If a claim is $500,000, the insurer pays $500,000, then collects $10,000 from the insured.
Under a SIR, the insurer only becomes involved once the retention is breached but with a deductible, the insurer is involved even if the loss amount is below the deductible.
Under a SIR, claims below the deductible are paid first by the insured while with a deductible, the insurer always pays first.
In section 4.4 on BA it states that "The insurer would pay that portion of the claim initially and the policyholder should then reimburse the insurer."
I am having trouble understanding that phrase, I feel as though that is how a deductible would work but maybe I am missing something.
Based on some independent research, as well as the thread above, I thought that the insurer would not be responsible for the amount under the SIR and that is (almost*) always the policyholder's responsibility. Only when a loss exceeds the SIR then the insurer would pay the amount above the limit.
*Additionally, in the event of claimant insolvency, only then, would the insurer maybe be legally or reputationally compelled to pay the claim to protect the policyholders. To protect against this risk, insurers are required to hold collateral (LOC) which is similar to how OSFI treats unregistered reinsurance.
An SIR is pretty similar to a deductible, yes. The main difference is that the insurer gets involved in all cases where there is a deductible, but only gets involved with a SIR if it breaches the retention.
Two scenarios:
Retention of 500K and a loss of 400K -> The insured handles everything on its own and does not notify the insurer
Retention of 500K and loss of 1M -> The insured notifies the insurer, the insurer handles everything and then bills the policyholder for 500K
I think the MCT is referring to the latter case, but I agree that is not consistent with my first post and how I understand a SIR to work as there wouldn't need to be a collateral. I'm not really sure here and perhaps it is referring to your claimant insolvency example where they have to hold collateral until the claim is fully settled for this specific scenario but its not clear what the mechanics are just from section 4.4. Or this section could also be referring to large deductible commercial policies and those are called SIRs which would then fit the bill.
Comments
I guess you can think of it as a deductible with different terminologies. But there are some small differences.
Let's say an insured has a $100K SIR/Deductible and a 1M liability policy.
Under a SIR:
Under a deductible:
Under a SIR, the insurer only becomes involved once the retention is breached but with a deductible, the insurer is involved even if the loss amount is below the deductible.
Under a SIR, claims below the deductible are paid first by the insured while with a deductible, the insurer always pays first.
In section 4.4 on BA it states that "The insurer would pay that portion of the claim initially and the policyholder should then reimburse the insurer."
I am having trouble understanding that phrase, I feel as though that is how a deductible would work but maybe I am missing something.
Based on some independent research, as well as the thread above, I thought that the insurer would not be responsible for the amount under the SIR and that is (almost*) always the policyholder's responsibility. Only when a loss exceeds the SIR then the insurer would pay the amount above the limit.
*Additionally, in the event of claimant insolvency, only then, would the insurer maybe be legally or reputationally compelled to pay the claim to protect the policyholders. To protect against this risk, insurers are required to hold collateral (LOC) which is similar to how OSFI treats unregistered reinsurance.
An SIR is pretty similar to a deductible, yes. The main difference is that the insurer gets involved in all cases where there is a deductible, but only gets involved with a SIR if it breaches the retention.
Two scenarios:
I think the MCT is referring to the latter case, but I agree that is not consistent with my first post and how I understand a SIR to work as there wouldn't need to be a collateral. I'm not really sure here and perhaps it is referring to your claimant insolvency example where they have to hold collateral until the claim is fully settled for this specific scenario but its not clear what the mechanics are just from section 4.4. Or this section could also be referring to large deductible commercial policies and those are called SIRs which would then fit the bill.