What does "self-insured retention" mean in an insurance policy?

The term "self-insured retention" refers to the amount of a loss that the insured party is responsible for paying out of pocket before the insurance coverage kicks in. In other words, it is essentially a deductible that the insured must meet before the insurer will contribute to the remaining costs associated with a loss. This mechanism is often used in excess insurance policies, where the self-insured retention must be satisfied before the insurer pays any claim.

This concept is important as it encourages the insured to manage their risks more effectively. It serves as a financial incentive for the insured to avoid small claims since they will bear a portion of losses themselves. Moreover, it can lower the overall insurance premiums since the insurer will have reduced exposure to smaller claims.

Other options may mention aspects of insurance but do not correctly define self-insured retention. For example, placing a limit on the policy's total coverage implies a cap on the amount the insurer will pay, which is different from the concept of retention. A clause protecting against uninsured losses or an amount deducted from the premium does not align with the definition either, as these address different aspects of coverage and payment structures. Thus, the understanding of self-insured retention as the initial portion of a loss that the insured must cover before insurance