Key Differences between Self-insured Retention and Deductible

Self-insured Retention

Self-insured retention (SIR) is a risk management strategy where the policyholder assumes a predetermined portion of the financial risk before their insurance policy responds to a covered loss. It represents the amount the policyholder agrees to pay out of pocket for each claim, and it typically applies before the insurance company’s obligation begins. Unlike a deductible, SIR is often a specific dollar amount, and it may be separate from policy limits. SIRs are commonly used in liability insurance and are designed to align the interests of the policyholder with effective risk management, potentially leading to lower insurance premiums and increased control over claims handling.

Feature of Self-Insured Retention (SIR):

  • Financial Responsibility:

Self-insured retention places financial responsibility on the policyholder, requiring them to pay a predetermined amount before the insurance coverage responds to covered losses.

  • Risk Management Tool:

SIR serves as a risk management tool, aligning the interests of the policyholder with effective loss prevention strategies and encouraging a proactive approach to risk mitigation.

  • Customizable Amount:

The SIR amount is often customizable, allowing policyholders to choose a level that aligns with their risk tolerance, financial capacity, and risk management goals.

  • Separate from Policy Limits:

SIR is typically separate from policy limits. It represents a distinct layer of self-assumed risk and is applied in addition to the overall coverage limits.

  • Influence on Premiums:

Employing SIR can potentially lead to lower insurance premiums, as policyholders sharing in the financial risk are often viewed more favorably by insurers.

  • Claims Handling Control:

Policyholders retain more control over claims handling when using SIR. They may have a more direct involvement in the management and settlement of claims.

  • Common in Liability Insurance:

SIR is commonly found in liability insurance policies, where policyholders, especially larger entities, prefer a degree of self-assumption of risk to control costs and claims handling.

  • Encouragement of Risk Mitigation:

SIR encourages policyholders to implement robust risk mitigation strategies, as a proactive approach to risk management can reduce the frequency and severity of losses.

  • Potentially Lower Financial Impact:

While the policyholder assumes a financial risk with SIR, the impact may be lower compared to fully self-insuring certain risks, providing a balance between risk retention and transfer.

  • Negotiability:

SIR is often negotiable between the policyholder and the insurer, allowing for flexibility in determining the appropriate level of self-insured retention based on the specific needs and preferences of the insured.

Types of Self-insured Retention:

  • Specific Dollar Amount:

The policyholder agrees to pay a fixed, predetermined dollar amount for each claim before the insurance coverage takes effect.

  • Per Occurrence:

SIR applies separately to each occurrence or claim event. The policyholder is responsible for the predetermined amount for each occurrence.

  • Aggregate SIR:

The policyholder’s financial responsibility is aggregated over a specified period, often a policy term. Once the aggregate limit is reached, the insurance coverage takes over for subsequent claims.

  • Per Claim or Per Loss:

Similar to per occurrence, but SIR applies on a per-claim or per-loss basis. The policyholder bears the predetermined amount for each individual claim.

  • Working Layer SIR:

In layered insurance programs, the SIR functions as a working layer, covering a specific range of losses, while excess insurance covers amounts beyond the SIR.

  • Blanket SIR:

A single self-insured retention amount that applies across multiple coverages within a policy. It simplifies administration but can increase exposure for certain risks.

  • Aggregate Stop-Loss SIR:

Combines elements of aggregate SIR and stop-loss insurance. The policyholder is responsible for aggregate losses up to a certain limit, beyond which the insurer assumes responsibility.

  • Incurred But Not Reported (IBNR) SIR:

The policyholder retains responsibility for losses that have been incurred but not yet reported. This type is common in long-tail liability claims.

  • Per Location SIR:

Applies to each insured location separately. It is suitable for businesses with multiple locations, allowing independent application of the SIR for each site.

  • Loss Portfolio Transfer:

The policyholder transfers a portfolio of past losses to the insurer. The insurer assumes responsibility for these losses, and the policyholder may be subject to a new SIR for future claims.

Pros of Self-Insured Retention (SIR):

  • Cost Savings:

Employing SIR can lead to lower insurance premiums, as policyholders share in the financial risk, making them more attractive to insurers.

  • Risk Management Control:

Policyholders retain more control over claims handling and risk management strategies, allowing for a more hands-on approach to loss prevention.

  • Customization:

SIR is often customizable, giving policyholders the flexibility to choose a level of financial responsibility that aligns with their risk tolerance and financial capacity.

  • Financial Incentives:

SIR provides financial incentives for policyholders to implement robust risk mitigation measures, potentially reducing the frequency and severity of losses.

  • Potential Cost Savings in Claims Handling:

Policyholders may experience cost savings in claims handling as they have more direct involvement and control over the process.

Cons of Self-Insured Retention (SIR):

  • Financial Exposure:

Policyholders assume a greater financial risk with SIR, which could result in higher out-of-pocket expenses in the event of a covered loss.

  • Cash Flow Impact:

The need to pay the SIR amount for each claim can impact cash flow, especially if there are multiple claims within a short period.

  • Complexity in Administration:

 Managing SIR can be administratively complex, requiring careful tracking of claims, payments, and adherence to the terms of the self-insured retention agreement.

  • Potential for Increased Liability:

Inadequate risk management practices or underestimating potential losses could expose policyholders to higher liabilities, especially if claims exceed the SIR amount.

  • Risk of Insolvency:

In the case of a financially unstable or insolvent policyholder, relying on SIR might lead to challenges in meeting financial obligations for covered losses.

  • Limited Risk Transfer:

While SIR provides cost savings, it doesn’t transfer the entirety of risk to the insurer, potentially leaving policyholders more exposed than with traditional insurance.

  • Impact on Negotiations:

Negotiating favorable terms for SIR can be challenging, and insurers may require stringent risk management practices before agreeing to lower premiums.

  • Less Predictable Costs:

SIR makes costs less predictable, as policyholders must be prepared for the financial impact of varying claim amounts and frequencies.


A deductible is the specified amount of money that a policyholder must pay out of pocket before their insurance coverage begins to reimburse for covered losses. It represents the initial financial responsibility borne by the insured before the insurance company assumes liability. Deductibles are common in various types of insurance policies, such as health insurance, auto insurance, and property insurance. Policyholders choose deductibles based on their risk tolerance and financial capacity, and the selected deductible amount influences insurance premiums. Choosing a higher deductible often leads to lower premium costs but requires the policyholder to bear a greater share of the initial costs in the event of a claim.

Features of Deductible:

  • Out-of-Pocket Expense:

Deductibles represent the initial amount the policyholder must pay from their own funds before the insurance coverage takes effect.

  • Cost-Sharing Mechanism:

Deductibles function as a cost-sharing mechanism between the insured and the insurance company, with the insured covering a specified portion of the loss.

  • Influence on Premiums:

The chosen deductible amount can influence insurance premiums, with higher deductibles often leading to lower premium costs.

  • Policy Customization:

Deductibles are customizable, allowing policyholders to select an amount that aligns with their risk tolerance and financial preferences.

  • Risk Management Tool:

Deductibles serve as a risk management tool, encouraging policyholders to consider the financial impact of claims and adopt measures to prevent small or frequent claims.

  • Common in Various Policies:

Deductibles are commonly found in different types of insurance policies, including health, auto, and property insurance, providing a consistent approach to managing claims.

  • Application to Covered Losses:

Deductibles apply to covered losses, representing a specific threshold that must be met before the insurance company begins reimbursing the policyholder.

  • Choice of Amount:

Policyholders have the flexibility to choose the deductible amount based on their financial capacity and willingness to assume a portion of the risk.

Types of Deductible:

  • Specific Dollar Deductible:

The policyholder is responsible for a fixed, predetermined amount for each covered claim.

  • PercentageBased Deductible:

The deductible is calculated as a percentage of the total covered loss, allowing for proportionate cost-sharing between the insured and the insurer.

  • Split Deductible:

Different deductible amounts may apply to different types of losses or coverage within the same insurance policy.

  • Annual Deductible:

The deductible applies over a specified time period, typically a year, and must be met before the insurer begins covering claims within that period.

  • Per Occurrence Deductible:

The deductible applies to each occurrence or event that triggers a claim, with the insured responsible for the specified amount for each incident.

  • CalendarYear Deductible:

Similar to an annual deductible, but it resets at the beginning of each calendar year, requiring the policyholder to meet the deductible again for subsequent claims.

  • Aggregate Deductible:

The policyholder’s responsibility is aggregated over a specified period, and the insurer covers claims once the aggregate limit is reached.

  • Moratorium Deductible:

Applied in situations where certain perils or risks have a waiting period before the deductible becomes effective.

  • Corridor Deductible:

A deductible structure that combines elements of specific and aggregate deductibles, providing flexibility in managing various types of claims.

  • Hurricane or Wind/Hail Deductible:

Specific to property insurance, this deductible is triggered by damage caused by hurricanes, wind, or hail, often expressed as a percentage of the property’s value.

  • Waiting Period Deductible:

Imposes a waiting period before the deductible is applicable, common in health insurance for certain medical conditions or treatments.

  • Vanishing Deductible:

A deductible that decreases or “vanishes” over time without any claims, providing an incentive for policyholders to maintain a claims-free record.

  • Zero Deductible:

Some policies offer a zero deductible, meaning the policyholder has no financial responsibility, and the insurer covers the entire loss from the first dollar.

  • SubLimit Deductible:

The deductible is subject to a sub-limit, restricting its application to losses below a specified monetary amount.

  • Exhaustible Deductible:

Applied until the deductible is fully exhausted, after which the insurer assumes full responsibility for subsequent claims.

Pros of Deductible:

  • Cost Reduction:

Choosing a higher deductible can lead to lower premium costs, reducing the overall expense of insurance coverage.

  • Customization and Flexibility:

Deductibles are customizable, providing policyholders with the flexibility to select an amount that aligns with their financial preferences and risk tolerance.

  • Risk Mitigation Incentive:

Deductibles serve as an incentive for policyholders to adopt risk mitigation measures, discouraging the filing of small or frequent claims.

  • Predictable Costs:

Lower deductibles result in more predictable out-of-pocket costs for policyholders, making budgeting and financial planning more straightforward.

  • Fair Cost Sharing:

Deductibles establish a fair cost-sharing mechanism, with the insured contributing a predetermined amount towards covered losses.

  • Encourages Responsible Behavior:

Policyholders with deductibles may exhibit more responsible behavior, as they have a direct financial stake in the cost of claims.

Cons of Deductible:

  • Higher OutofPocket Expenses:

In the event of a claim, policyholders with deductibles face higher initial out-of-pocket expenses before insurance coverage begins.

  • Potential Financial Strain:

High deductibles may pose a financial strain on policyholders, especially if multiple claims occur within a short period.

  • Complexity in DecisionMaking:

Selecting an appropriate deductible requires careful consideration, and the complexity of this decision may be challenging for some policyholders.

  • Risk of Underinsurance:

Choosing a high deductible could result in underinsurance if the policyholder is unable to afford the deductible in the event of a covered loss.

  • Incentive to Avoid Claims:

While deductible incentivizes responsible behavior, it may discourage policyholders from filing legitimate claims to avoid out-of-pocket costs.

  • Varying Impact on Premiums:

The impact of deductible choices on premiums can vary, and selecting a higher deductible may not always result in significant premium reductions.

  • Limited Cost Savings for Low Claims:

Policyholders with low claims frequency may not realize significant cost savings by opting for a higher deductible, as the reduced premium may not offset the potential out-of-pocket expense.

  • Less Predictable Financial Impact:

Deductibles introduce variability in the financial impact of claims, making costs less predictable and potentially challenging for budgeting.

  • Potential for Increased Claims Handling Complexity:

Higher deductibles may increase the complexity of claims handling, especially if there are disputes or challenges related to the application of the deductible.

Key Differences between Self-insured Retention and Deductible

Basis of Comparison Self-Insured Retention (SIR) Deductible
Definition Amount retained before policy responds. Initial amount paid by policyholder.
Role in Risk Management Part of overall risk management strategy. Tool for cost-sharing in insurance.
Amount Handling Can be a specific dollar amount. Fixed amount or percentage of a claim.
Trigger for Payment Paid only if the policy limit is exceeded. Applied to every covered loss.
Application to Policy Limits Applied in addition to policy limits. Part of the overall policy limit.
Frequency of Payment Potentially less frequent, for major losses. Applies to each covered loss occurrence.
Impact on Premiums May result in lower premiums. Generally influences premium costs.
Insurer Control Policyholder controls SIR amount. Insurer determines deductible amount.
Risk Retention Level Higher risk retention compared to deductibles. Typically lower risk retention.
Common in Liability Insurance Frequently used in liability policies. Found in various insurance types.
Impact on Claims Handling May require more involvement in claims. Simplifies claims handling for small losses.
Relationship to Policy Limits Separate from policy limits. Influences the available policy limit.
Flexibility in Selection Often negotiable and customizable. Options for policyholders to choose.
Financial Impact on Policyholder Potentially significant financial impact. Generally lower financial impact.
Encouragement of Risk Mitigation May incentivize robust risk management. Encourages policyholders to manage risks.

Key Similarities between Self-insured Retention and Deductible

  • Policyholder Responsibility:

In both self-insured retention and deductible scenarios, the policyholder is responsible for covering a certain amount of the loss before the insurance coverage takes effect.

  • Risk Sharing:

Both SIR and deductibles involve a form of risk-sharing between the insurance company and the policyholder. They are mechanisms for spreading the financial burden of a loss.

  • Cost Reduction:

Employing either SIR or a deductible can result in lower insurance premiums. By assuming a portion of the risk, policyholders demonstrate a commitment to risk management, which insurers often reward with reduced premium costs.

  • Financial Buffer:

Both SIR and deductibles serve as a financial buffer for insurers. They help prevent the filing of small or frequent claims and encourage policyholders to engage in loss prevention measures.

  • Common in Various Policies:

Both concepts are commonly found in various types of insurance policies, including property insurance, liability insurance, and certain types of professional liability insurance.

  • Policy Customization:

Policyholders can often choose the level of self-insured retention or deductible based on their risk tolerance and financial capabilities. This allows for a degree of customization in insurance policies.

  • Claims Handling Process:

In both cases, the claims handling process typically involves the policyholder covering the initial portion of the loss, and the insurance company taking over once the self-insured retention or deductible is met.

  • Risk Management Tool:

Both SIR and deductibles serve as risk management tools. They encourage policyholders to adopt measures that minimize the likelihood of losses and reduce the overall risk to the insurer.

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