Insurance 101: what’s a retention?
Ever feel like reading your policy creates more questions than it answers? You’re not alone. Insurance is filled with jargon. While there’s good reason for your insurance policy being a 100+ page monster filled with a dizzying web of definitions and exclusions, the ‘why‘ doesn’t really matter to most people…they just want to know what’s covered. We want to help!
In insurance, the word retention is always related to how a company handles its business risk. When you ‘retain’ risk, it usually means you’re not insuring it. The common alternative would be to pay an insurance company an annual premium to take that risk off your hands.
But we’re getting more specific than that when we’re looking at the declarations page of your policy. If you have a directors & officers, errors & omissions or cyber liability policy (among many others) you’ve probably seen it, followed by a dollar amount. The carrier is specifically referring to something called a self-insured retention (SIR).
This is the amount of money that you are required to pay, per claim, before the insurance company will start paying.
The carrier is asking you to “retain” some of the risk in the form of a small amount of self-insurance. The amount they ask you to retain depends on who you are and what insurance you’re buying. A startup’s fiduciary liability policy is considered low-risk so there may only be a $1,000 (or even $0) retention for each claim. A professional liability policy for a hedge fund is considered high-risk so the retention may be as high as $250,000. Large public companies might have D&O policies with self-insured retentions of $1,000,000 or more.
As we alluded to above, it’s partially about how much risk is at stake. But there are some less obvious reasons why you’re required to pay a retention. You might actually have a reason to be happy about it…ok so not happy per se but just hear us out.
Basically? Yes. But if you really want to dig into the nitty-gritty of the differences, we recommend checking out this article from our friends at the International Risk Management Institute.
Want to know more? Talk to us! You can contact us at firstname.lastname@example.org or create an account here in order to get started on a quote. Want to read more on the subject? Check out our other insurance pro tips.
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