What is 'Basket Retention'

Basket retention policies are pre-packaged insurance policies covering several risks and typically cost the insurer less than covering each risk under its own policy or rider.

Breaking Down 'Basket Retention'

Basket retention is most commonly found with self-insurance, alternative risk transfer techniques and reinsurance. Companies will use basket retention as an excess indemnity insurance contract.

Basket retention is used to combine multiple risks into one bundled package. Basket retention coverage limits a company’s risk to a specific amount when losses result from different risk types. For example, a tour company running a Duck Boat tour, where the one vessel travels on land and sea, would be interested in a boat owner’s policy and automobile coverage, ideally provided under one insurance policy. Creating a basket retention policy could provide coverage to handle the risks of operating a vessel on both land and sea.

In the above Duck Boat example, the company could have difficulty finding an insurer to create a unique policy covering both their land and sea risks. The company could decide instead to self-insure, which is becoming increasingly popular across many areas of insurance, from self-insured health plans to liability coverage.

Self-insurance by its very definition means you are deciding to enter a much smaller risk pool. The self-insured company will have more control over the risks being covered, as they have their own historical data to evaluate when determining whether to insure on their own, separate from the much larger risk pools available through an insurance company.

An Alternative to Basket Retention for Transferring Risk 

Insurers and reinsurers are constantly looking for new ways to diversify and transfer their risk portfolios, with basket retention being one of those ways. Another way is through the issuance of catastrophe bonds, which typically increase in popularity following a succession of major storms, as seen during the active and destructive 2017 North American hurricane season.

Collateralized reinsurance has been increasing in popularity in recent times despite being more difficult to obtain than catastrophe bonds or through the use of basket retention. Collateralized reinsurance is an example of a creative way to offer investors access to various insurance clusters, thereby co-joining insurance markets with capital markets to further spread risk.

This overall trend of packaging risks and offering them to private investors comes with many pros and cons, the cons being evident from the experience of the Great Recession of 2008 when many were caught off guard by how far risky investment vehicles and insurance repackages had spread globally.

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