What does risk retention mean in the context of insurance?

Risk retention refers to the strategy where an individual or organization acknowledges the existence of a risk and decides to accept it, rather than transferring it to another party or attempting to avoid it entirely. This often means that the individual or organization will handle any potential losses that arise from that risk internally.

By retaining risk, businesses may save on insurance premiums as they are not paying to transfer the risk to an insurer. However, this also means they must have the financial capacity to cover any losses that may occur, which could lead to greater financial exposure if not carefully managed. Organizations often use risk retention in situations where the cost of transferring the risk is higher than the potential loss or when they are capable of self-insuring for certain predictable risks.

In contrast, other options describe different approaches to risk management. For instance, transferring the risk involves using insurance to pass the risk to an insurance company, while completely avoiding the risk means not engaging in activities that would expose one to that risk at all. Reducing the frequency of risks, on the other hand, involves implementing strategies to lower the chance of a risk occurring but does not address the acceptance of potential losses.