What is a potential downside of self-insured retention for policyholders?

The chosen answer highlights a significant disadvantage of self-insured retention, which is the potential for the insured to incur substantial out-of-pocket costs. In a self-insured retention arrangement, a policyholder assumes financial responsibility for losses up to a certain retention limit before insurance coverage kicks in. This means that if a loss occurs, the policyholder must first pay out of pocket for expenses until they exceed that retention threshold. Depending on the nature of the loss and the retention amount, this can lead to significant financial strain, especially for large claims.

The mechanism of self-insured retention is designed to encourage policyholders to manage their risks and losses wisely. However, when significant claims arise, the immediate financial burden can create challenges that the policyholder may not be prepared to handle, impacting their cash flow and overall financial health.

The aspect of increased premiums may apply in different contexts, but self-insured retention often has the opposite effect, potentially lowering overall premium costs. Discouragement of risk management practices is a concern that could arise under certain circumstances, but better financial planning and preparation should ideally promote proactive risk management, rather than diminish it. Automatically increasing coverage limits does not apply to self-insured retention as it typically maintains preset limits rather than adjusting them based on