What does "self-insured retention" refer to in insurance terms?

Self-insured retention (SIR) refers to the amount that the insured must pay out of pocket before the insurance coverage kicks in for a loss. This is similar to a deductible, but there are important distinctions. With a self-insured retention, the insured assumes more of the financial responsibility for certain claims, and this amount must be satisfied before the insurer becomes liable to cover additional costs.

For example, if a business has a self-insured retention of $10,000 and faces a claim for $50,000, the business must first pay the $10,000 before their insurance policy starts to cover the remaining $40,000. This structure is often used in higher-risk situations or for certain specialized policies where the insured may prefer to retain a larger portion of risk.

The other options do not accurately capture the definition of self-insured retention. Maximum payout pertains to the coverage limits established in the policy. The percentage of claims retained by an insurer relates to how they manage risks overall rather than what the insured pays out-of-pocket beforehand. Lastly, while a deductible does relate to out-of-pocket costs, SIR is specifically about costs that must be met before the insurer begins to pay, making this term and its implications distinct from standard deductibles