In risk management, what does the term "retention" refer to?

In risk management, "retention" refers to the strategic decision to accept the potential for loss rather than transferring that risk to another party, such as through an insurance policy. This approach assumes that an organization is willing to absorb the financial consequences associated with certain risks.

When a business chooses to retain risk, it often does so after a thorough assessment of its risk tolerance, potential exposure to loss, and the cost-effectiveness of insurance versus self-insurance. Companies may retain risk for various reasons, including the belief that the likelihood of occurrence is low, that the cost of insuring the risk would be higher than the potential loss, or because they have the financial capacity to manage those losses themselves.

This concept is central to the overall risk management process, where organizations evaluate which risks they might be better off handling internally rather than passing off to insurers. The decision to retain risk can form part of a broader risk management strategy that includes risk avoidance, transfer, or mitigation.