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Active retention is when a business sets aside money to cover future losses, such as equipment failure. This can save money on insurance premiums, but is not a substitute for adequate coverage. Careful calculation is necessary to avoid miscalculations.
Active retention is a term used to describe a situation where a business deliberately develops a system whereby it sets aside a certain amount of money with the intention of using it to take care of certain types of problems that might arise in future. The issues under consideration include fairly large instances that occur infrequently or smaller instances that may occur a little more frequently. Active conservation is relevant for insurance purposes, because a company that practices active conservation may be able to make some informed and calculated risk decisions that will save it money it would have been required to pay an insurance company to cover such risk on his behalf.
The very premise of active intent denotes that the business is aware that specific situations will arise in the future that will be a loss to the business. Active retention is a kind of insurance by the company against such an event. An illustration of active insurance can be seen in a situation where a company that produces bottled water periodically sets aside a specific amount determined by the company’s management. The regularity of the payment of the money to the account set up for this purpose will also be ascertained by the company. Assuming the business has the occasional instance where some of the equipment used to bottle water fails, it can draw on the funds saved through active conservation to repair or replace the broken equipment.
The benefit of this type of practice comes from the amount of money the business will save in the form of 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 that would mean the practice has paid off. Active retention is not a substitute for adequate business insurance and is only used to cover small or minor calculated losses that may occur. Another reason for the practice of active retention is to save the business from the additional burdens of obtaining insurance coverage for anticipated losses. The practice of using active retention is one that requires careful study of the situation so as to avoid any miscalculation that could actually cost the business more in the end, rather than saving it money.
Smart Assets.
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