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What Is Active Retention?

Esther Ejim
Esther Ejim

Active retention is a term used to describe a situation where a company deliberately develops a system whereby it puts a stated amount of money aside with the intention of using it to take care of certain types of problems that might possibly arise in the future. The problems under consideration include fairly major instances that occur rarely, or smaller instances that may occur a little more frequently. Active retention is pertinent for insurance purposes, because a company that practices active retention may be able to make some informed and calculated decisions regarding risks that will enable it to save the money that it would have been obliged to pay an insurance company to cover such a risk on its behalf.

The very premise of active intention denotes that the company is aware of the fact that specific situations will occur sometime in the future that will serve as a loss to the company. Active retention is a sort of insurance by the company against such an occurrence. An illustration of active insurance can be seen in a situation where a company that makes bottled water sets aside a specific sum periodically as determined by the management of the company. The regularity of the payment of the money into the account set up for the purpose will also be determined by the company. Assuming the company has occasional instances where a piece of the equipment used in bottling the water breaks down, it can dip into the funds saved through active retention to either fix or replace the broken equipment.

Man climbing a rope
Man climbing a rope

The benefit to this type of practice stems from the amount of money that the company will save in the form of the premiums it would have paid to an insurance company. Assuming the company is able to save up to 50 percent of the money it would have paid to an insurance company, then it would mean that the practice paid off. Active retention is not a replacement for proper business insurance and is only used to cover little or minor calculated losses that may occur. Another reason for the practice of active retention is to save the company from the additional charges attached to obtaining insurance coverage for the expected losses. The practice of using active retention is one that requires a careful study of the situation so as to avoid any miscalculation that may actually cost the company more in the end, rather than allowing it to save money.

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