Funded Retention

Example

“The hospital established a funded retention program by depositing $2 million into a trust account to pay medical malpractice claims within their $500,000 per-claim retention, rather than paying losses out of operating cash flow.”

Memory Tip

Think 'Fund it before you need it' - funded retention means putting money aside now to pay for future retained losses, like a dedicated savings account for claims.

Why It Matters

Funded retention provides financial discipline and ensures money is available when losses occur, protecting your organization's cash flow and operations. It also demonstrates financial responsibility to insurers, potentially leading to better terms and lower premiums on excess coverage above the retention level.

Common Misconception

Some organizations think funded retention is just an unnecessary tying up of capital that could be used elsewhere in the business. However, unfunded retention can create significant cash flow disruptions when large losses occur, and insurers often require proof of ability to pay retained amounts, making funding arrangements necessary for coverage approval.

In Practice

A manufacturing company chooses a $1 million retention on their general liability coverage with $10 million in excess limits. They establish a funded retention by purchasing a $3 million letter of credit at an annual cost of $45,000. When a product liability claim results in a $800,000 settlement, the funds are drawn from the letter of credit rather than disrupting the company's working capital. Over five years, they pay $225,000 in letter of credit fees but avoid cash flow disruptions from three major claims totaling $2.1 million.

Etymology

Combines 'funded' from Latin 'fundus' meaning bottom or foundation, with 'retention' from Latin 'retinere' meaning to hold back, reflecting the practice of holding back money as a foundation for future loss payments.

Common Misspellings

Related Terms

More in insurance

Other insurance terms you should know

See Also