What Is Basket Retention?
The term basket retention refers to insurance policies that are pre-packaged to cover several risks—risks that are bundled together into one policy. These insurance policies typically cost the insurer less than they would if they covered each risk individually under its own policy or rider. Basket retention is often used when individuals and corporations self-insure.
How Basket Retention Works
Insurance policies are designed to protect insured parties against specific risks. A single policy covers and reimburses the policyholder against losses incurred against a specific risk. For example, a homeowner who takes out a flood insurance policy may claim losses that stem from water damage as a result of a flood. But this type of policy doesn't protect the insured homeowner against any losses that may arise from a fire. They would need to take out a separate policy for that. This can be costly. So rather than take out multiple policies, anyone who needs coverage for multiple risks can pay for what the industry calls basket retention.
- Pre-packaging several risks into a single policy can be more cost-effective because taking out individual policies is a far more expensive option.
- Coverage limits the insured party’s risk to a specific amount when losses result from different risk types.
- Basket retention is common among those who self-insure and as an alternative risk transfer technique.
Basket retention is used in the insurance industry as a way to combine multiple risks into a single, bundled package. 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.
This kind of coverage is most common among those who self-insure—companies and individuals who put aside their own money to cover losses rather than paying an insurance company. It is also used in alternative risk transfer techniques and reinsurance. Companies often use basket retention as an excess indemnity insurance contract.
Basket retention occurs when several risks are pre-packaged and included in a single insurance policy.
In the Duck Boat example noted above, the company could have difficulty finding an insurer to create a unique policy that covers both their land and sea risks. The company may 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 decide to enter a much smaller risk pool and you're willing to cover the loss yourself rather than pay premiums to an insurance company to do so. A self-insured company has 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.
Catastrophe Bonds and Collaterazlized Reinsurance
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 hurricane season of 2017 in North America.
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.