Basket Retention Definition
A basket retention is an insurance policy that provides coverage for losses resulting from different types of risks. The basket retention policy costs the insurance company lesser amounts for coverage of losses from multiple risks as against when the each loss is accounted for under its policy.
Reinsurance, self-insurance and some other policies have basket retention as their attributes. Under a basket retention coverage, a company’s risk has a limited amount when losses are from multiple risks.
A Little More on What is Basket Retention
A basket retention coverage is one that combines losses from multiple risks into a bundle package. This coverage is termed a pre-packaged insurance policy that limits a company’s risk to a certain amount, in cases where losses emanate from different risk types.
Basket retention policies are often used by companies as excess warranty insurance contract. It is used for self-insurance and as an alternative risk transfer techniques. This insurance policy (basket retention) as offered by insurers create unique coverage for losses from different risk types.
For example, a company that runs tour of travel services in both land and sea and decide to be self-insured in order to be covered from losses on both land and water.
An Alternative to Basket Retention for Transferring Risk
There are many ways insurers package risks and offer them to investors in form of insurance policies. Although, basket retention policies are effective means for transferring risks, there are other evolving alternatives. Insurance companies are constantly devising new methods and policies for risk transfer. The issuance of catastrophe bonds is one of the alternative to basket retention.
Another alternative is the Collateralized reinsurance that reinsurers use. This is a cluster of insurance policies that reinsurers our insurers offer to individuals or investors as a method of spreading our transferring risk. Both catastrophe bonds and collateralized reinsurance have gained much popularity overtime especially after economic glooms.
References for Basket Clause
Academic Research on Basket Clause
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Are Negative Pledge Clauses in Public Debt Issues Obsolete, McDaniel, M. W. (1982). Bus. Law., 38, 867.
What Does the Euro Mean for You, Yeowart, G. (1997). Int’l Fin. L. Rev., 16, 9.
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Transaction cost economics and contractual relations, Maher, M. E. (1997). Cambridge Journal of Economics, 21(2), 147-170.
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