Retention is a risk management technique in which a company or individual retains a portion of the risk of loss rather than transferring it to an insurance company through purchasing insurance. This can either replace insurance altogether (self-insurance) or supplement it by covering smaller, more predictable losses that fall under the insurance deductible.
Key Points:
Risk Retention: Undertaking the responsibility to pay for part of a loss. This can be a strategic decision to reduce insurance costs or improve cash flow management.
Types of Retention:
- Active Retention: Deliberately retaining risk to save costs or because the risk is manageable.
- Passive Retention: Unknowingly retaining risks due to ignorance or lack of attention.
Benefits of Retention:
- Control over claims handling
- Potentially lower insurance costs over time if losses are low
- Increased incentive for loss prevention and safety programs
Challenges with Retention:
- Potential significant unexpected costs if the losses are high
- Requires robust financial reserve and risk management strategies
Implementing Retention:
To effectively implement a retention strategy, businesses or individuals should:
Risk Assessment: Understand the frequency and potential severity of losses.
Financial Analysis: Ensure there are sufficient reserves to cover potential retained losses.
Loss Prevention Measures: Invest in robust safety and prevention strategies to minimize losses.
Regular Review: Continually assess the effectiveness of the retention policy and adjust as necessary based on shifting risk landscapes and financial considerations.
For official guidelines and deeper understanding, consult governmental acts and financial regulatory standards that guide self-insurance and risk retention, such as provisions in the Insurance Core Principles by the International Association of Insurance Supervisors or local regulatory bodies responsible for insurance regulation and compliance.
Retaining risk can provide significant benefits if managed carefully and within the capacities of an organization or individual.
