What does retention in risk management refer to?

Retention in risk management refers to assuming or accepting risk, which means that an organization chooses to bear the financial consequences of potential losses instead of transferring or minimizing that risk through other means, such as insurance. By choosing retention, the business acknowledges that certain risks are either manageable or could be lower in cost than insuring against them.

Organizations often implement retention strategies when they have high confidence in their ability to manage the associated risks or when the costs of acquiring insurance are prohibitively high compared to the potential losses. This approach can be particularly effective in cases where the risk is predictable and within manageable limits.

Alternative approaches listed, such as minimizing risk through insurance coverage, talk about transferring risk rather than retaining it. Eliminating any possibility of loss is often impractical and not a viable risk management strategy, as it is impossible to completely eliminate all risks. Transferring risk to another party, usually through insurance or contracts, means that the responsibility for that risk moves away from the original party, contrasting the concept of retention.