a self-insurance form that includes setting aside funds to reckon for the estimated or upcoming loss.
How Active Retention Works
Sometimes active retention can also be called planned retention. The primary purpose of active retention is to account for expected or smaller losses. Active retention is viewed as a self-insurance form. In this form of self-insurance, the entity that expects to undergo loss uses its funds to account for the occurrences instead of insurance policies.
People looking for a way to avoid the cost incurred in dealing with insurance agencies and additional fees use active retention. Someone could also use it to avoid costs associated with the assets traditional insurance does not cover. It is also necessary to note that companies and other businesses can embrace the implementation of active retention. They would usually do this for corporate assets or business operations that are critical.
In some instances, active retention can be a risk mitigation form within any institution with a corporate environment. Therefore, any business that embraces active retention will list its risks and plan its exposure. For instance, many businesses require the services of a vendor. It is the work of the vendor to facilitate the delivery of the business's products. Although the vendor is reliable, the business will still need to consider that the vendor might terminate the operation or go bankrupt at any time—especially in times of economic duress. Planning for such events ensures the business has funds set aside to find another solution quickly. These solutions might include finding another warehouse or even a more expensive method of delivery. Moreover, the business might decide to draw out an insurance plan. This alternative method's disadvantage is that the business might be critically affected by the paperwork and time lag associated with it.
Active Retention Example
A daughter receives a boat from her parents as part of her inheritance. The boat has no liens. Also, a life insurance policy has been included on the estate of which she is the beneficiary. The daughter discovers that it is pretty expensive to insure the boat and can't afford the premium every month. Instead, she decides to set aside some of the money from the life insurance policy that will cover the boat value, miscellaneous damages, labor, the cost of parts, and boat value inflation.
Compared to the insurance policy, the daughter will not be required to pay monthly payments for any potential damages or losses. Also, she will not be required to meet specific requirements when filing a claim. Also, she won't have to deal with invalid or uncovered claims.
Suppose the daughter decided to embrace passive retention and bought a new car instead of setting aside money for the boat. If a storm hits and the boat is swept out to sea, she will be out of the boat's value since she lacks insurance coverage. If the daughter embraced active retention, she would at least have the cash savings to cover the damages done by the storm.