What is "risk retention"?

Risk retention refers to the strategy where an individual or organization chooses to take on the financial consequences that arise from certain risks rather than transferring those risks to another party, such as through purchasing insurance. This approach is often adopted when the cost of insuring a particular risk is deemed higher than the potential loss it could cause, or when the organization has the financial capacity to absorb the losses.

When entities retain risk, they are essentially making a conscious decision based on cost-benefit analysis regarding how much risk they are willing to withstand. This practice can be a part of a broader risk management strategy, where certain lower-level risks are retained while higher-level risks are transferred.

The process involves carefully evaluating and planning for the potential impacts of risks, including financial reserves or contingency plans, rather than relying solely on insurance coverage. In summary, risk retention is a calculated decision to manage potential losses internally, illustrating a proactive approach to managing risk without necessarily depending on external insurance solutions.