Definition
Risk Retention
Risk retention is consciously bearing a risk oneself rather than transferring it, by paying for any losses out of one's own resources.
Retention is appropriate for high-frequency, low-severity risks where insurance would be uneconomic, and for losses small enough to absorb. Choosing a higher deductible is a partial retention, since the insured keeps the first slice of any loss in exchange for a lower premium.
Businesses formalise large-scale retention through self-insurance funds or captive insurers. The decision to retain rests on whether the potential loss is affordable and whether the cost of transfer exceeds the expected benefit.
Related terms
- DeductibleA deductible is the amount you must pay yourself before your insurance starts covering a claim.
- Risk TransferRisk transfer is a risk-management technique that shifts the financial consequences of a risk to another party, typically an insurer.
- Self-InsuranceSelf-insurance is the practice of setting aside one's own funds to meet potential losses instead of buying an external insurance policy.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.