Property and Casualty Insurance Practice Exam

What does the term 'Self-Insured Retention' refer to?

1. The mandatory limit set by the insurance company

2. The deductible amount the insured must cover out of pocket

3. The total coverage limit of the policy

4. The state tax on insurance premiums

The correct answer is: The deductible amount the insured must cover out of pocket

Self-Insured Retention (SIR) refers to the amount of risk that an insured party retains or is responsible for before the insurance coverage kicks in. This concept is similar to a deductible in traditional insurance arrangements, where the insured pays a specified amount before the insurer starts to provide coverage. When a policy includes a self-insured retention, it signifies that the insured must cover this predetermined dollar amount out-of-pocket when a loss occurs. Only after this retention is met will the insurer begin to pay for the additional losses above that threshold. This mechanism encourages the insured to manage risks and losses adequately, knowing that they have a financial responsibility prior to insurance involvement. Understanding self-insured retention is critical for individuals or businesses considering how much risk they can handle versus shifting to an insurer, as well as for evaluating the overall cost of risk management strategies.