What does risk retention refer to in insurance?

Risk retention in insurance involves a scenario where individuals or organizations voluntarily assume financial responsibility for certain losses instead of transferring that risk to an insurance provider. This can occur through various forms, such as choosing higher deductibles on insurance policies, choosing not to purchase coverage for certain risks, or deliberately self-insuring certain exposures.

By selecting to retain risk, the insured understands that they accept the potential financial consequences of those losses. This strategy is often employed when the probability of a loss occurring is low or when the cost of insurance would exceed the expected losses. In such cases, retaining the risk can be a sound financial decision, allowing the insured to save money on premiums while managing their potential liabilities through other means.

In contrast, the other choices provide alternative perspectives on risk management strategies but do not accurately describe risk retention. For instance, transferring financial responsibility to an insurer fundamentally alters the risk profile, while purchasing additional coverage or limiting coverage relates to how one structures their insurance policies rather than directly assuming risk. Thus, risk retention centers on the idea of knowingly accepting certain risks rather than offloading them to an insurance entity.