Meaning
Risk sharing provisions identify the specific portion of an insured loss that a policyholder must pay before the insurer contributes funds. Choosing a higher deductible retention reduces the annual premium cost but increases the financial burden on the company during a claim event. This arrangement applies to each individual occurrence or as an aggregate total over the policy year.
Loss Exposure
Companies evaluate their balance sheet strength to determine how much loss they can comfortably absorb. A substantial deductible retention signals to the insurer that the firm is committed to high safety standards and loss prevention. This self insurance component aligns the interests of the policyholder with those of the underwriter.
Claim Settlement
Payments from the insurance company only begin once the insured has proven they have paid the full amount of the deductible retention. For a property damage claim of one hundred thousand dollars with a twenty thousand dollar retention, the insurer only pays the remaining eighty thousand. This mechanism simplifies the process for small losses which the company handles internally.
Financial Impact
Budgeting for potential losses requires a clear understanding of historical claim frequency and severity. If multiple events occur in a single year, the cumulative cost of the deductible retention can strain corporate liquidity. Firms often set aside a dedicated reserve fund to cover these expected out of pocket expenses.
