It’s good that you ask what is insurance retention. In a nutshell, it pertains to how companies hand the risk of their business. Retaining risk means that the business does not insure it. An alternative to taking off risks from your hands is to pay annual premiums to a particular insurance company that will cover you.
But if you are looking at the declaration page of the policy, this can get more specific. Perhaps, you have a cyber liability, errors, and omissions, or directors and officers liability policy, then you might have seen this already. Usually, the dollar amount will follow this. The carrier stated there refers to SIR or self-insured retention.
This pertains to the amount you need to pay for every claim before the insurer will begin paying benefits. Essentially, the carrier asks the policyholder to retain a portion of the risk through the self-insurance amount. The retention amount will depend on the insurance you will purchase and your risk exposure.
For a fiduciary liability coverage of a startup, the retention of every claim is low since the risk is also considerably low. In contrast, for policies with higher risks, the retention would also be higher. Those huge public companies who purchased D&O policies most likely have at least 1 million dollars of self-insured retention.
3 Reasons Why Do Policyholders Need To Pay Retention
You’ve already learned about what is insurance retention. It is stated earlier that it is about the amount of risk. But other than that, there are other reasons as to why retention is needed to be paid. This might not seem obvious, so we choose to discuss them below.
#1. This is deterrent
Insurance retention means you are involved in the game. In case you are making a mistake, you will be partially liable for it. This is schemed by insurance companies to promote personal responsibility. With this, insurance companies can take more risks from more entities.
#2. Retention makes insurance cheaper
Claims can be expensive. Whether the insurance companies will pay for the claims in the end or not, it will cost them money and time to set off a claim filed by policyholders.
Insurance retention sets the reference point of a claim severity before carriers begin the events needed to be taken. Without this, any small claim may push the rate of premiums to increase throughout the entire industry.
#3. A tool used to control cost
If the retention amount increases, premiums decreases, and vice versa. This balances the pricing made by companies who take on the particular risk amount versus the amount they will pass on insurance companies. Well, you should know how long does an insurance company has to pay a claim.
How Important Is Insurance Retention?
The insurance market has remained flat over the years. Since the market is static, the growth of individuals brands will only come from market share taken from other brands while the retention of existing customers is maximized. The brands have plenty of opportunities to maximize customer retention. This can start from the initial acquisition. It can continue through each customer communication and interaction and during the culmination of every renewal activity.
Retention Vs. Deductible
The insurance term deductible is a common word that is familiar to most people. It pertains to the amount you need to pay after filing a claim to the insurance company; you should know why insurance policies have deductibles. After you fully paid the deductible, this is when the insurance will start, and you will pay the rest of your bill following your policy terms.
When we say insurance retention, it is just the same. Essentially, it is the amount of money that you will have to retain or pay yourself. Those two terms are frequently used interchangeably. However, there is a minimal difference between retention and deductible.
Technically, the very first thing to be paid is retention. The insurance company is expecting the payment for this before they start paying for the coverage. But if your insurance policy includes a deductible, your insurance company will have to pay for the whole claim. So then, it will be sending your bill for your deductible amount.
In other words, you will be paying for the insurance retention directly, whereas you have to reimburse the insurance company for your deductible. My friends, you may read what insurance companies don’t want you to know to understand your policy better.
Since more people understand deductible better, most companies are using it even if they mean insurance retention. For instance, the health insurance provider asks you to pay a deductible amount before paying anything. In such a case, the payment made is retention and not a deductible.
It’s A Wrap!
Now that we have answered your question: what is insurance retention? You have probably understood that it makes insurance less costly for everyone. Therefore, choosing to increase your insurance retention would drive your premium lower. That is because the bigger your share in the bill, the lesser the insurance company needs to.
As a result, you will be charged with lower premiums. This will likewise drive down the insurance overall price. If your claim amount is lower than the retention amount, then it would make sense that you pay for it yourself rather than pass it to the insurance company. Anyway, it’s still best to have an insurance policy; I guess you should know why insurance often provides peace of mind.