Navigating insurance is complex, but there are three key concepts that often cause the most confusion: deductibles, insurance retentions and coinsurance. While they may seem similar, each has unique implications for policyholders and insurers.
What is a deductible?
A deductible is the amount the insured must pay before their insurance coverage begins.
It acts as a threshold and helps share financial responsibility between the policyholder and insurer.
Deductibles also prevent insurers from covering small, frequent claims. For example, if you have a $5,000 deductible on a $1 million policy, your coverage is effectively reduced to $995,000.
Sometimes, insurers may pay third-party claims directly and later recover the deductible from the insured.
What is a Self-Insured Retention (SIR)?
A self-insured retention (SIR) is similar to a deductible but operates differently.
With an SIR, the insured covers a set amount of losses out-of-pocket before insurance applies.
However, unlike a deductible, the policy’s full limit remains intact once the SIR is exceeded. For instance, a $2 million policy with a $200,000 SIR still provides the full $2 million in coverage, but only after the insured pays the first $200,000 of covered claims.
Insurers generally have no involvement in claims below the SIR amount, whereas with deductibles, they handle all claims and then seek reimbursement.
Another distinction is collateral: large deductibles may require collateral from the insured, but SIRs do not since the insurer has no obligation until the threshold is met.
Why insurers impose deductibles and retentions
Both mechanisms serve key purposes for the insurers and their clients. A number of them are listed below.
Encourage risk management
Insured parties are motivated to minimize risks since they share in the cost of losses.
Balance financial responsibility
Deductibles and retentions prevent the overreliance on insurance and aligns interests between insurer and insured.
Discourage excessive claims
Small or trivial claims are less likely to be filed when insurers charge deductions.
What is coinsurance?
Coinsurance refers to cost-sharing between the insurer and insured after the deductible is met. The insured pays a percentage of covered claims, while the insurer pays the rest.
For example, with 20% coinsurance, the insured pays 20% of costs, and the insurer covers 80%.
This arrangement ensures both parties contribute to claim costs and can significantly influence the insured’s financial exposure.
Choosing the right approach for your business
Understanding deductibles, retentions and coinsurance is crucial in structuring the right insurance coverage for your organization.
Each option carries different implications for financial responsibility, premium level and claims handling.
Businesses of all sizes should assess their risk tolerance, cash flow and budget when deciding which structure fits best.
If you’re uncertain which approach is right for you, seeking expert guidance is essential. The team at Axxima can help tailor an insurance strategy that balances protection with affordability, ensuring your coverage aligns with your business needs.
