what is risk retention

Risk retention refers to an individual or organizations decision to take responsibility for a particular risk it faces, as opposed to transferring the risk over to an insurance company by purchasing insurance. This means that the individual or organization has chosen to pay for any losses out of pocket rather than purchasing insurance as a means of transferring the financial burden of a loss to a third party. Companies often retain risks when they believe that the cost of doing so is less than the cost of fully or partially insuring against it. Insurance companies also have to make a decision about which risks to retain. Risks they choose not to retain are transferred out via a reinsurance policy. When a company chooses or is forced to retain a certain risk, they will be responsible for paying any losses from that risk out of pocket. Risk retention can be voluntary or forced, and it is usually an economic calculation that determines whether to retain a risk or not.