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.

  1. Risk Retention Group (RRG)

    A risk retention group is a state-chartered insurance company ...
  2. Active Retention

    Active retention is the practice of protecting against a loss ...
  3. Complete Retention

    Complete retention is a risk management approach where a company ...
  4. Retention Ratio

    The retention ratio is the proportion of earnings kept back in ...
  5. Underlying Retention

    Underlying retention is the net amount of risk or liability arising ...
  6. Retention Bonus

    A retention bonus is a financial incentive offered to a valuable ...
Related Articles
  1. Investing

    Dividend Ratios: Payout And Retention

    The dividend payout ratio and retention ratio measure how much profit a company gives back to shareholders as dividends. When a business earns money, it must decide whether to use all of its ...
  2. Investing

    Payout Ratio vs. Retention Ratio: When to Use Which

    The payback ratio and retention ratio collect different information and are useful in different situations.
  3. Insurance

    When Things Go Awry, Insurers Get Reinsured

    Guru Warren Buffett is making this sector popular. Learn more here.
  4. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  5. Managing Wealth

    6 Insurance Policies That Protect the Wealthy

    Here are six types of insurance that the wealthy use to protect their assets.
  6. Insurance

    Insurance Coverage: A Business Necessity

    Don't go to work without this policy in place - especially if your work is in your home.
  7. Insurance

    An Advisor's Guide to Prof. Liability Insurance

    A guide to what financial advisors need to know about professional liability insurance.
  8. Insurance

    The Importance Of Property Insurance

    Property insurance is important, but there's a lot you need to learn in order to get the proper coverage.
  9. Insurance

    4 Frequently Asked Auto Insurance Questions

    Answers to four common questions about what and who is covered by an auto insurance policy.
  1. Can my insurance company refuse me coverage?

    Insurance isn't always as straightforward as other products, and insurers can deny coverage in many different instances. Read Answer >>
  2. How does the 80% rule for home insurance work, and how do capital improvements affect ...

    Learn what the 80% rule in homeowner's insurance is and what homeowners need to do so their insurance company covers the ... Read Answer >>
  3. How does the insurance sector work?

    Learn more about the insurance sector, a historically safe place for equity investors and the home of some of the largest ... Read Answer >>
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center