Table of Contents
What is Insurance Retention
An insurance withholding is the part of an insurance claim paid by the insured rather than by the insurance company. A deductible is a common example of a withholding, although there are other types of withholding. Withholding allow the insured to reduce insurance premiums assuming that part of the risk is insured.
Self-insurance withholding
A self-insurance withholding (RAS) is a part of each insurance claim that is not insured by the policy and that requires the insured to pay before it becomes effective. For example, if there is a $10,000 self-insurance withholding in a US $1,000,000 general liability policy, the insured must pay the first $ 10,000 of any claim, before the insurer responds.
Deductible
A deductible for a liability policy is an amount that must be reimbursed by the insured to the insurer for each claim paid. Unlike a self-insurance withholding, insurers are required to immediately handle third-party claims and obtain reimbursement from them. Insurers may not resist paying third-party claims, even if their insured do not reimburse deductible obligations.
Nominal Retrospective Policies
Instead of a definite withholding that is applicable to each claim, policyholders can arrange for a nominal retroactive policy to share a portion of the losses with the insurer. These withholding may vary depending on the type of claim and often have a maximum amount of the withholding added, thus providing some limit to the exposure of losses.
Financial effect
The insured often chooses to have withholding in their policies as insurers offer discounts on insurance premiums, depending on the amount withheld. A company that properly manages its risk can save money from insurance premiums in advance, withholding a portion of the risk. Even if losses of the insured are expected, there is a beneficial time to pay the withholding after the claim, rather than at the beginning of the policy year.
Moral effect
Insurers benefit from withholding because their insured have a financial interest in preventing or minimizing the effect of claims. This eliminates the fear that the insured may act recklessly, knowing that they are fully insured, with no other financial implications than more than the increase in annual premiums. Some insurers require that all policies have a certain level of retention as a loss control method.
Guarantee and Pre-financing
The insured who opt for withholding must be willing to pay in case of any claim. Outside the SAN, insurers require guarantees from their insured that the withholding will be promptly reimbursed, upon payment of the claim. Insurers ensure these reimbursement obligations through some type of guarantees, such as a cash deposit or letters of credit published by the insured.