What characterizes passive risk retention?

Passive risk retention is characterized by the approach of not taking deliberate measures to set aside funds or resources to cover potential losses that could arise from unknown or unforeseen risks. This means that an organization or individual acknowledges that they are retaining certain risks but does not actively manage them, such as through reserving funds specifically for potential loss scenarios. Instead, it assumes that any potential losses will need to be addressed as they occur, without prior preparation for those who have not been identified or quantified.

Choosing to rely on passive risk retention can lead to significant financial implications if unforeseen events do occur since no dedicated financial buffer exists to manage those risks. This contrasts with active risk retention strategies, where entities might set aside funds or implement other measures to address risks they expect or that are identifiable.