AD Banker Property and Casualty Practice Exam

Retention risk refers to the practice of an individual or organization assuming responsibility for certain risks rather than transferring them to an insurance provider. When an entity decides to retain risk, it means they have evaluated their situation and determined that they can absorb potential losses, whether due to financial capability or risk management strategies. This often occurs when the costs of transferring the risk through insurance are higher than the expected losses or when the risks are manageable.

The choice to retain risk can make sense in situations where the potential loss is relatively minor or when the insured has the resources to cover it directly. Companies often weigh the cost of insurance against the likelihood and potential costs of a loss before deciding whether to retain or transfer that risk. Retaining risk is a common approach in self-insured retention programs and can also be a strategic decision to lower overall insurance costs in the long run. Understanding retention risk is essential in risk management and insurance planning, as it influences how businesses allocate resources to mitigate or accept losses.