insurance

Funded Retention

A risk management approach where an organization sets aside money in advance to pay for expected losses up to a certain amount, rather than purchasing traditional insurance or hoping to pay claims from operating cash flow. This pre-funded amount serves as a financial cushion for predictable losses.

Example

“The hospital established a $2 million funded retention program for medical malpractice claims, setting aside money each year rather than paying higher insurance premiums for first-dollar coverage.”

Memory Tip

Think 'Fund it Before You Need it' - money is set aside in advance to pay for losses you choose to retain.

Why It Matters

Funded retention can reduce insurance costs while ensuring money is available for claims without disrupting operations. This approach provides more control over claims handling and can generate investment income on retained funds, though it requires discipline and proper funding levels.

Common Misconception

Some organizations think funded retention is the same as being uninsured or that it's only suitable for large companies. Actually, funded retention is a disciplined approach that requires careful calculation and adequate reserves, and can be used by mid-sized organizations when properly structured with excess insurance above the retained amount.

In Practice

A manufacturing company with $500,000 annual worker compensation claims implements a $250,000 funded retention program. They deposit $300,000 into a dedicated account and purchase excess insurance above $250,000. This reduces their insurance premiums by $75,000 annually. Over five years, they save $375,000 in premiums, earn $45,000 in investment income on the fund, and pay $1.1 million in claims from the retention fund while maintaining full protection for large losses.

Etymology

Combines 'funded' (financially backed with set-aside money) and 'retention' (keeping or holding risk rather than transferring it to insurers).

Common Misspellings

funded retensionfunded retentionfundded retentionfunded retantion

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