Meaning
Specific dollar amount that an insured party must pay toward a loss before the insurance policy begins to provide coverage. The self-insured retention differs from a deductible because the insured party usually manages its own claims and defense costs for the retained portion. Large commercial programs often utilize this arrangement when the company has the capacity to handle smaller losses.
Financial Strategy
Companies choose a higher retention to lower the annual premium paid to the insurer. This financial strategy creates an incentive for the company to implement better safety protocols while managing its own self-insured retention. Because the company pays the first layer of any loss, it maintains greater control over the initial legal strategy.
Policy Trigger
Coverage by the insurer is only activated once the total cost of claims exceeds the retention amount. The insurer typically has the right to monitor any claim that has the potential to break through the self-insured retention. This ensures that the interests of the insurer and the insured are aligned as the loss grows.
Retentions
Limits are not reduced by these amounts, whereas deductibles often deplete the available insurance. This means a one million dollar policy with a hundred thousand dollar retention still provides a full million dollars of coverage above the self-insured retention.
