What does risk retention involve?

Risk retention involves acknowledging risks and preparing for potential losses. This concept is grounded in the understanding that an organization or individual may choose to accept certain risks, often because the costs of transferring those risks, such as through insurance, are higher than the potential losses from those risks. By recognizing and preparing for these risks, the entity can develop strategies to manage and mitigate their impact, such as through budgeting for losses or maintaining reserves.

Choosing to retain risk indicates a deliberate decision to handle the consequences of certain risks internally instead of shifting that burden to another party, as would be the case with transferring risks to an insurer. This approach can be practical, especially in situations where the likelihood of loss is low or the costs of reinforcement or insurance exceed the potential financial impact.