Self-insured retentions

Definition

Self-insured retentions refer to the amount of risk that a company or organization retains before an insurance policy kicks in to cover further losses. This mechanism allows businesses to absorb certain losses themselves, which can lead to reduced insurance premiums and greater control over risk management. Self-insured retentions are often used in conjunction with liability or property insurance, creating a balance between self-funding and transferring risk to an insurer.

5 Must Know Facts For Your Next Test

1. Self-insured retentions allow organizations to save on premium costs by retaining a portion of their risk, incentivizing better risk management practices.
2. Typically found in commercial general liability policies, the retention amount can vary widely depending on the industry and specific business risks.
3. Organizations with self-insured retentions must have sufficient financial resources to cover potential losses up to the retention limit.
4. Implementing self-insured retentions can lead to a more tailored risk management strategy, as businesses can choose retention amounts based on their risk appetite.
5. This practice is common among large corporations that have the financial capability to manage risks internally without relying solely on traditional insurance.

Review Questions

• How do self-insured retentions impact a company's overall risk management strategy?
  • Self-insured retentions play a significant role in shaping a company's risk management strategy by allowing them to retain a portion of their risk. By absorbing some losses, companies can lower their insurance premiums and create incentives for improved risk mitigation practices. This leads organizations to be more proactive in addressing potential risks, as they directly feel the financial impact of any claims up to the retention limit.
• Discuss the advantages and disadvantages of using self-insured retentions in a corporate insurance strategy.
  • The use of self-insured retentions offers several advantages, including reduced insurance premiums and increased control over claims handling. However, it also comes with disadvantages, such as the need for adequate cash flow to cover potential losses and the possibility of incurring significant expenses if claims exceed the retention limit. Companies must carefully assess their risk tolerance and financial capacity before implementing this strategy.
• Evaluate how self-insured retentions influence the relationship between an organization and its insurance provider, considering both parties' perspectives.
  • Self-insured retentions significantly influence the relationship between an organization and its insurance provider by creating a shared responsibility for managing risks. From the insurer's perspective, clients with higher retention amounts may appear as lower-risk candidates since they are willing to absorb more losses. This dynamic can foster collaboration, as both parties work together to minimize claims. Conversely, organizations must ensure they maintain transparent communication with insurers regarding their retained risks and potential exposures to avoid conflicts during claims processing.

Related terms

Deductible: The amount that a policyholder must pay out-of-pocket before an insurance policy starts to pay for covered expenses.

Captive Insurance: An insurance company created and owned by one or more non-insurance companies to insure the risks of its owners.

Risk Transfer: The process of shifting the financial burden of potential losses from one party to another, typically through insurance contracts.