Which option best describes funded retention?

Which option best describes funded retention?

• A. No separate fund to pay for losses
• B. A stand-alone insurance policy
• C. Firmly set aside funds every period to pay for losses that are predictable and high severity
• D. Unfunded retention

Answer: (C)

Funded retention means creating a dedicated reserve inside the organization to pay for losses, contributing to that fund on a regular basis so it can cover anticipated, potentially large losses. This approach keeps funds available specifically for these losses rather than paying out of general cash flow or transferring the risk to an insurer. The option that describes this best states that funds are firmly set aside every period to pay for losses that are predictable and high severity, which captures both the ongoing accumulation of reserves and the goal of covering substantial, foreseeable losses. In contrast, having no separate fund describes unfunded retention, where losses are covered from current resources as they occur. A stand-alone insurance policy describes external risk transfer rather than retention funded by internal reserves. Unfunded retention similarly relies on current resources without a dedicated reserve.

Funded retention means creating a dedicated reserve inside the organization to pay for losses, contributing to that fund on a regular basis so it can cover anticipated, potentially large losses. This approach keeps funds available specifically for these losses rather than paying out of general cash flow or transferring the risk to an insurer. The option that describes this best states that funds are firmly set aside every period to pay for losses that are predictable and high severity, which captures both the ongoing accumulation of reserves and the goal of covering substantial, foreseeable losses.

In contrast, having no separate fund describes unfunded retention, where losses are covered from current resources as they occur. A stand-alone insurance policy describes external risk transfer rather than retention funded by internal reserves. Unfunded retention similarly relies on current resources without a dedicated reserve.