DEFINITION OF ‘BASKET RETENTION’
An insurance policy that covers exposures to several different types of insurance risk. Basket retention offers a single retention and covers a defined layer of losses for the insurer. This can allow the insurer to realize cost savings that it would not have achieved by using a policy to cover each type of risk.
INVESTOPEDIA EXPLAINS ‘BASKET RETENTION’
Basket retention is most frequently associated with self-insurance, alternative risk transfer techniques, and reinsurance. In this sense, basket retention is used when a number of risks can be integrated, and when the company looking to transfer the risk is looking for cost-efficiencies by not paying a third-party for coverage. Basket retention coverage is purchased in order to limit a company’s risk retention to a specific amount when an event results in losses from several different risk types, such as both property and casualty.
Companies use basket retention as an excess indemnity insurance contract. In some cases, insurance companies will create pre-packaged contracts that combine different risks that a particular company is likely to be interested in. For example, a shipping company may be interested in general liability and auto liability coverage. Coverage will apply in a situation in which an occurrence involves several of these risks.
When companies use multi-line excess of loss reinsurance agreements, they may find situations in which an event’s occurrence involves a combination of different types of covered risks. For example, a policy covers property loss in excess of $40,000 as well as casualty loss of $40,000, but also features basket retention. If an event involves both casualty and property, the retention will be limited to $40,000 for the occurrence. Because the occurrence applies to two different types of risk, the basket retention is allocated according to the percentage of loss that type of risk experienced. The reinsurer would thus be liable for the amount of retention that each risk type is subject to.