What does risk retention involve?

Risk retention involves accepting the inherent risks associated with certain activities or situations and choosing to manage any potential losses that may result. This concept is critical in risk management because it recognizes that not all risks can or should be transferred to an insurance company or another party. By retaining the risk, individuals or organizations take on responsibility for managing that risk themselves, which may involve setting aside reserves to cover possible losses, investing in mitigation strategies, or simply accepting the potential financial impacts.

In contrast, other options depict different approaches to risk management. Avoiding the risk entirely entails taking actions to prevent the risk from occurring in the first place, while transferring the risk involves shifting liability to another party, typically through insurance. Reducing the severity of the risk suggests implementing measures to lessen the impact should a risk event occur. However, risk retention specifically focuses on the acceptance and management of those risks internally.