What is an important consideration when deciding on self-insured retention?

When considering self-insured retention, the primary focus is on the amount of risk an organization is willing to undertake. Self-insured retention refers to a portion of a loss that the insured must cover before the insurance coverage kicks in. Organizations need to assess their financial capacity and risk tolerance to determine what level of retention they can manage responsibly without compromising their financial stability. This means evaluating the potential costs associated with various risks and comparing them to the costs of purchasing traditional insurance to cover those risks.

Being aware of the amount of risk one is willing to take is essential because it influences the overall risk management strategy of the organization. If a company opts for a high self-insured retention, it may save on premium costs but could face significant financial loss in the event of a claim. Conversely, a lower retention level might involve higher premiums but offers more security against unexpected large losses.

While the organizational structure, tax implications, or historical performance of an insurance company are relevant consideration factors in overall risk management and insurance purchasing decisions, they are not as directly impactful in the decision-making process for self-insured retention as the willingness to take on risk. Understanding the balance between risk and retention is key to effective insurance and self-insurance strategies.