Retentions
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The retention, sometimes called a deductible, is the amount that the insured has to pay for its own claims. For consumer car insurance this is often called an excess. For example, if a claim for £10m is submitted under a W&I policy with a retention of £2m then, if the claim is successful, the insured will only receive an £8m payout from the insurer since they have to incur the costs of the £2m retention.
This system is beneficial to insurers for two reasons. Firstly, it keeps the insured accountable. There will be a disincentive for the insured to make lots of futile claims since they know they will have to incur some of the costs of those claims. Secondly, it is a threshold below which the insured will not bring a claim (why would they if they have to pay?). Consequently, the retention is very important to insurers and nearly all W&I policies are sold with a retention.
Retention amounts for W&I policies are based off of the enterprise value of the transaction and will usually range from 1% of enterprise value down to 0.25%. Occasionally, for low risk transactions, insurers might be able to offer a nil retention but this is currently quite rare and only really seen on real estate transactions.
As standard, the retention will be a fixed amount that does not alter throughout the duration of the policy, however, insurers can offer tipping retentions and dropping retentions.
Tipping
A tipping retention will start off at a set amount such as 0.5% of enterprise value but once a claim has eroded this amount completely (i.e. there has been a claim/claims above 0.5% of enterprise value) the retention will tip down to a lower amount such as 0.25% of enterprise value. This means that the applicability of the lower retention is conditional on there being claims under the policy. Therefore it can be seen as a reward for bringing claims so not always favoured by insurers.
Dropping
A dropping retention is similar to a tipping retention in that it involves two different amounts of retention, however, the retention will only drop to the lower amount after a set period of time where there has been no claims. For example, if a W&I policy has a retention of 0.5% of enterprise value initially and drops to 0.25% after 12 months, the dropping will only occur if there hasn’t already been a claim for 12 months since the policy started. This can be seen as a reward for not bringing claims and therefore can often be favoured by insurers.