What this risk is, and why it matters
Deductibles and self-insured retentions set how much of each loss the organisation pays before insurance responds, and on significant or frequent claims they translate directly into a cash-flow burden. With a large retention the business may fund defence and settlement costs for an extended period, tying up working capital and complicating reserves. For a senior executive, the size and mechanics of the retention are a treasury matter, not a technical detail, since they determine the real, near-term cost of any claim.
Legal and regulatory framework
Retention structures are contractual but interact with solvency and reserving expectations, financial-reporting standards on provisioning for retained losses, and, where SIRs are used, requirements that the retention be genuinely funded before excess cover attaches. The report explains how retention funding, attachment and any collateral or reserving obligations are treated in your chosen jurisdiction, alongside the accounting framework for recognising retained-loss liabilities, without assessing a specific programme.
Typical scenarios and impact
Scenarios include a high SIR absorbing the full cost of mid-sized claims, a series of retentions straining liquidity in a bad year, and an excess layer that will not engage until the retention is demonstrably exhausted. Outcomes range from manageable, well-reserved retained losses to liquidity pressure and covenant strain where claims cluster. The aggregate cash exposure across an active claims year can far exceed the premium saved by choosing a higher retention.
Mitigation framework and when to engage an expert
Model retained-loss scenarios against liquidity and reserves before setting deductibles, and consider aggregate stop-loss or captive structures where frequency is high. Confirm exactly how and when excess layers attach. Engage brokers to optimise the retention-versus-premium trade-off, actuaries to reserve realistically, and coverage counsel where attachment or exhaustion is contested, so the financing of retained losses is planned rather than discovered mid-claim.