A loss retention agreement, also known as an LRA, is a contractual agreement between an insurance company and policyholder. The purpose of an LRA is to shift some of the risk of a potential loss from the insurer to the policyholder. In other words, the policyholder agrees to retain a specified amount of the risk associated with the loss.

An LRA is commonly used in commercial insurance policies and is typically negotiated by the insurance agent and the policyholder. The agreement will specify the exact dollar amount of the loss that the policyholder will be responsible for retaining. For instance, if the LRA specifies $50,000, the policyholder will be responsible for covering the first $50,000 of any claim.

Why would a policyholder agree to an LRA? There are a few reasons. First, agreeing to an LRA can often result in lower insurance premiums. Insurance companies are more willing to offer lower premiums if they know that the policyholder is sharing in the risk of a loss. Second, an LRA can give the policyholder more control over the claims process. If the loss is within the specified amount of the LRA, the policyholder can choose whether or not to submit a claim to the insurance company and deal with the loss on their own.

However, it is important to note that agreeing to an LRA does come with risks. If the loss exceeds the specified amount of the LRA, the policyholder will be responsible for covering the excess amount. This can result in significant financial losses for the policyholder. Additionally, agreeing to an LRA can put a strain on cash flow, as the policyholder will need to have sufficient funds on hand to cover any losses within the agreed-upon amount.

In conclusion, a loss retention agreement can be a useful tool in managing risk and controlling insurance costs for businesses. However, it is important to carefully consider the risks and benefits before agreeing to an LRA. As with any insurance policy, it is important to work with a knowledgeable insurance agent who can help guide you through the process and ensure that your business is adequately protected.