How does "self-insured retention" function in an insurance policy?

Self-insured retention (SIR) operates within an insurance policy as a specific amount that the insured must pay out of pocket before the insurance coverage becomes active for a particular claim. This is a common feature in certain types of insurance policies, particularly in liability insurance, where the insured is responsible for managing and covering their own losses up to that retention limit. Once the self-insured retention amount has been satisfied, the insurer then takes over and pays for any additional costs associated with the claim, up to the policy limits.

This mechanism essentially shifts a portion of the risk back to the insured, encouraging them to manage their risks more effectively, while allowing the insurer to lower their premium rates as they expect some of the financial responsibility to fall on the insured.