What is Insurance Retention and Examples?

What is Insurance Retention and Examples?

Insurance retention refers to the amount of risk that an insured party is willing to assume without transferring to an insurance company. In other words, it is the portion of risk that is self-insured by the policyholder. Insurance retention is an important aspect ofrisk management, as it helps to determine the appropriate level of insurance coverage needed to protect against potential losses.

Types of Insurance Retention

There are two main types ofinsurance retention:deductiblesand self-insurance.

Deductibles are a common form of insurance retention in which the policyholder agrees to pay a certain amount of money out of pocket before the insurance company begins to cover losses. For example, if a policy has a $1,000 deductible, the policyholder must pay the first $1,000 of any covered loss, and the insurance company will pay the remaining amount.

Self-insurance is another form of insurance retention in which the policyholder assumes the risk of potential losses and sets aside funds to cover those losses. This can be done by creating a reserve fund, purchasing bonds or other financial instruments, or simply relying on the company's own financial strength to absorb the losses.

Examples of Insurance Retention

An example of insurance retention can be seen in the case of a small business owner who decides to self-insure against property damage. Rather than purchasing insurance coverage for potential losses, the business owner creates a reserve fund to cover any damage that may occur. This allows the business owner to save money on insurance premiums while still protecting against potential losses.

Another example of insurance retention can be seen in the case of a homeowner who chooses to increase their deductible in order to lower their insurance premium. By agreeing to a higher deductible, the homeowner assumes a greater portion of the risk of potential losses, but also saves money on their insurance premiums.

Insurance and Financial Planning

Insurance plays an important role infinancial planning, as it helps to protect against potential losses and provides peace of mind. When choosing insurance coverage, it is important to consider the level of insurance retention that is appropriate for your individual needs and financial situation.

For example, if you have a high net worth, you may choose to self-insure against certain types of losses, while still maintaining insurance coverage for catastrophic events. On the other hand, if you have a lower net worth, you may choose to purchase higher levels of insurance coverage in order to protect against potential losses.

Ultimately, the key to choosing the right insurance coverage is to work with a qualified insurance professional who can help you assess your individual needs and develop a comprehensive insurance plan that meets your specific goals and objectives.

Conclusion

Insurance retention is an important aspect of risk management and financial planning. By understanding the different types of insurance retention and how they can be used to protect against potential losses, individuals and businesses can make informed decisions about their insurance coverage and ensure that they are adequately protected. To maximize the benefits of insurance, it is important to work with a qualified insurance professional who can help you identify your individual needs and develop a comprehensive insurance plan.