What is a self-insured retention (SIR) in insurance?

A self-insured retention (SIR) refers specifically to the portion of a loss that the insured must pay out of pocket before the insurer begins to cover any remaining costs. This concept is often applied in liability insurance policies and outlines the initial financial responsibility, distinguishing it from traditional deductibles, where the insurer handles all losses above the specified deductible amount.

In essence, the presence of a self-insured retention means that the insured retains a level of risk; they must first incur a specified amount of loss themselves before the insurance coverage kicks in. This is vital in understanding the financial dynamics between the insured and the insurer, as it emphasizes the insured's commitment to managing smaller losses or risks directly, leading to a potential reduction in premiums.

Clarity in these definitions is important, especially in contrast to other terms like deductibles, which usually function at a different level in terms of claims processing.