What is Risk Retention?

Risk retention is the acceptance of risk by a person or business, rather than shifting it to an insurer through an insurance policy. This means that you have elected to directly pay for any losses incurred, rather than acquiring insurance to shift the loss elsewhere.

Risk retention can be achieved by setting up a self-insurance reserve fund to pay for losses as they occur, rather than shifting the risk to an insurer or using hedging instruments. A business is more likely to engage in risk retention when it determines that the cost of self-insurance is lower than the insurance payments or hedging costs required to transfer the risk to a third party. A large deductible on an insurance policy is also a form of risk retention.

Example of Risk Retention

As an example of risk retention, an organization elects to retain the risk of damage to its office equipment, rather than purchasing an insurance policy that will cover this risk. This is a reasonable choice, since most office equipment is relatively inexpensive, and so can be replaced for a modest amount. This approach is also less administratively troublesome, since the organization can replace any losses at once, rather than having to file a claim with its insurer for reimbursement.