Funded Retention is characterized by which practice?

• A. A funding mechanism to cover losses
• B. Unfunded retention
• C. Firmly set aside funds every period to pay for losses that are predictable and high severity
• D. Self-insurance

Answer: (C)

Funded retention means keeping the risk in-house but paying for the losses from a dedicated reserve you build up over time. The idea is to set aside funds each period so there’s a pool available to cover losses that are both predictable in size and potentially large (high severity). This pre-funding creates a cash cushion, helps avoid sudden cash-flow shocks after a big claim, and can be more cost-effective than buying insurance if the expected losses are well understood. It’s a form of self-insurance, just with a specifically funded reserve rather than paying ongoing premiums to an insurer. This is exactly what the described practice embodies: systematically setting aside funds to pay for these sizable, predictable losses.