What does risk retention involve?

Risk retention refers to the practice of acknowledging the existence of risks and choosing to handle any potential losses that arise from those risks rather than transferring or completely avoiding them. This approach often includes establishing reserves or funding methods to cover losses that may occur, thus allowing an individual or organization to accept the risk as a part of its overall risk management strategy.

By actively recognizing and deciding to manage these risks internally, parties can develop strategies to mitigate impacts and improve their operational resilience. This can be especially relevant for businesses or individuals who may decide that the cost of transferring risk (e.g., through insurance) is higher than the potential loss they are able to absorb.

Understanding risk retention is crucial in effective risk management practices, and it emphasizes the importance of being prepared to face the consequences of potential negative events rather than attempting to sidestep them entirely.