What is meant by retention of risk?

Retention of risk refers to the concept where an individual or entity accepts the responsibility for potential losses that could occur, rather than transferring that risk to another party, such as an insurance provider. When one retains risk, they are essentially choosing to bear the loss themselves if a specific event occurs that leads to financial loss.

This approach to risk management is often taken when the potential loss is deemed manageable or when the costs to transfer the risk—such as insurance premiums—are viewed as higher than the potential loss itself. It’s important to recognize that while retention might result in cost savings or be practical in certain situations, it also requires a careful assessment of one’s ability to absorb losses without jeopardizing financial stability.

In contrast, sharing risk involves distributing the likelihood and impact of loss among multiple parties, and transferring risk means shifting responsibility to an insurer through a policy. Avoiding risk altogether is about taking measures to ensure that the loss scenario is completely eliminated, which is often not possible in practical terms.

Overall, the concept of retention of risk highlights the balance between risk management strategies, financial capability, and the nature of the risks faced.