What does "risk retention" mean in insurance?

Risk retention in insurance refers to the choice of an individual or an organization to assume responsibility for the financial consequences of certain risks. This means that rather than transferring the risk to an insurance company, the policyholder decides to handle potential losses directly, paying for any damages or losses out of pocket.

This approach is often considered when the cost of insurance premiums is deemed too high relative to the likelihood of a loss, or when the insured believes they can manage the risks better on their own. By retaining risk, policyholders may also engage in strategies that help them mitigate potential losses, however, the core concept is about self-funding the risk rather than shifting it to an insurer.

The other options involve concepts that do not align with the definition of risk retention: transferring risk is about obtaining insurance, excluding risks refers to limitations within a policy’s coverage, and mitigating potential claims involves preventive measures rather than accepting the risk itself.