Insurance terms can be confusing for those unfamiliar with the jargon.
But three of the most commonly misunderstood are deductibles, retentions and coinsurance.
While they generally all deal with how risk and cost are shared between you and the insurer, they work in slightly different ways. We’ll explain how in this article.
What is a deductible?
A deductible is the amount you pay before your insurance coverage kicks in. In other words, until you’ve paid that portion, the insurer won’t cover expenses. Deductibles are designed to spread financial responsibility, prevent insurers from handling small claims and lower your ongoing premiums.
For example, if your policy has a $200,000 deductible on a $20 million limit, the insurer’s liability is $19.8 million. Sometimes, insurers might pay a third party first and then collect the deductible amount from you.
What is a self-insured retention (SIR)?
A self insured retention is similar, but not entirely the same. With an SIR, you pay claims out of your own pocket until you reach the agreed amount. Only then does the insurer step in, but the full policy limit remains intact once the SIR is exhausted.
Unlike a standard deductible that typically applies as a set amount for each individual claim, SIR is often calculated on a cumulative basis over the entire policy term. After the SIR has been fully paid by the insured, the insurer takes over and covers any further losses or claims, in line with the policy’s conditions.
Why insurers impose deductibles and retentions
Both mechanisms encourage policyholders to manage risks responsibly. By having “skin in the game,” the view is that policyholders are less likely to make trivial claims and more likely to invest in safety measures. This helps control costs, prevents excessive claims and keeps insurance premiums affordable.
What is coinsurance?
Coinsurance is different. Once the deductible is met, the insurer and insured share covered costs by percentage. For example, under an 80/20 coinsurance arrangement, you pay 20% and the insurer covers 80% of each claim. This continues until you hit the policy’s out-of-pocket maximum.
Choosing what’s right for your business
The choice depends on your business’s risk tolerance, claims history and cash flow.
Understanding these differences is critical when structuring coverage that balances protection with affordability.
The insurance experts at Axxima can guide you through these options and tailor a policy that fits your unique needs.
Whether it’s structuring deductibles, weighing retentions, or clarifying coinsurance, the team at can Axxima help you make informed decisions that are right for your business.
