Insurance retention refers to the amount of money an insured person or business becomes responsible for in the event of a claim. For insurance companies, retentions moderate their risk by placing a financial responsibility onto those they insure, which may moderate riskier behaviors. Retentions, such as deductibles or self-insured retention, moderate premium costs for those purchasing insurance.
Deductibles on insurance policies represent a common type of insurance retention. As a rule, the insurance company removes the total deductible from the claim payment. For example, if a person has a $250 deductible on comprehensive auto insurance, the insurer pays out $750 on a $1,000 claim. For claims under $250, the person assumes responsibility for the entire amount. The policyholder often bears no obligation to pay the deductible or, if they do, the insurance company settles the claim first and then bills the policyholder.
Self-insured retention refers to a less-widespread practice of assigning an amount that the insured person bears responsibility to pay out-of-pocket, before the insurance company makes any payments. For example, if a person agrees to a self-insured retention clause of $2,000 in a property insurance policy, the person must pay out at least $2,000 in costs related to the property damage. The insurance company begins making payments, up to the policy limit, only after the policyholder pays the $2,000 self-insured retention.