Insurance retention (IR) is the portion of an insurance claim not covered by the insurance company. It is that portion of any loss paid by the insured. A deductible is the most common example of insured retention although there are other types of retentions.
An insurance deductible on a liability policy is the amount that must be paid or reimbursed by the insured for each claim paid by the insurance company. In the case of third party claims, insurance companies must pay any legitimate covered claim and seek reimbursement of the deductible from their insured. They may not withhold paying third party claims even if the insured does not reimburse the deductible.
Self-insured retention (SIR) is that portion of an insurance claim that is not payable under the policy, and requires the insured to pay the applicable amount to the third party claimant before the insurance becomes effective. For example, if there is a $50,000 self-insured retention on a $1,000,000 general liability policy, and there is a $100,000 third party claim, the insured must pay $50,000 before the insurance company will be obligated to pay $50,000.
Insureds can reduce their cost of liability insurance by accepting high deductibles and high levels of self-insured retention (SIR) because they are sharing the risk with their insurance company. For those insureds that have the resources, accepting a high deductible and high level of self-insured retention is usually a wise economic decision.
Insurance companies prefer insureds who are willing and able to accept high deductibles and high levels of self-insured retention because their insured has a financial stake in preventing or minimizing the effect of claims. Thus, insurance companies reward such insureds with lower premiums.