What is meant by 'risk retention' in insurance?

Risk retention refers to the practice of accepting and managing certain risks instead of transferring them to an insurance company. By choosing to retain risk, an individual or business acknowledges that they will bear the financial consequences of those risks if they occur. This approach often involves setting aside resources or funds to cover potential losses, rather than paying insurance premiums to shift that risk to an insurer.

Organizations may practice risk retention when they assess that certain risks are manageable or when the cost of transferring those risks (through premiums) is deemed higher than the potential losses they might incur. It allows entities to exercise control over the risk management process and can be a strategic decision based on their risk appetite and financial situation.

In certain contexts, risk retention can also encompass the implementation of risk management strategies, but it fundamentally revolves around the acceptance of risk and the responsibility that comes with it, distinguishing it from other options that involve transferring risk or acquiring insurance coverage.