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Term: Bikini Deductible

15 Aug 2015

DEFINITION of ‘Bikini Deductible’
The portion of risk separating the primary layer and the excess layer of risk. The bikini deductible, also called corridor self-insured retention, represents risk that a company self-insures against. It is so named because the layers of coverage loosely resemble the bikini bathing suit: a thin layer of protection at the top and at the bottom, but no protection in the middle.

Insurance coverage can be expensive, and companies looking to insure against specific risks want to make sure that they are only purchasing the amount of coverage that they really need. Just as insurers make estimates as to the amount of losses they might expect to experience from a particular policy, so to do businesses estimate the likelihood that a claim will result from the work that they do.

Bikini deductibles apply in situations in which the insured carries a primary layer of insurance and an excess layer, but decides to cover the losses in between these two layers if a loss actually occurs. For example, consider a business that has a liability policy with a coverage limit of $20 million. While bidding for a new contract, it finds out that the company tending the bid wants a coverage limit of $50 million. The business determines that it has rarely experienced losses in the past on similar contracts, and that this loss experience trend suggests that it is unlikely to experience a loss in the future. Rather than purchase additional coverage to bridge the entire difference between the $20 million that it has and the $50 million that is required, it decides to self-insure for half of the difference between the two limits (1/2 of $30 million = $15 million). Losses between $20 million and $35 million will be covered by the business through self-insurance, while losses in excess of $35 million will be covered by the excess policy.

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