What does retention refer to in terms of risk management?

Retention in risk management refers to the strategy where an individual or organization consciously decides to accept and manage a certain level of risk, rather than transferring it to another party or eliminating it. This is often achieved through methods such as deductibles, where a policyholder agrees to pay a certain amount out-of-pocket before the insurance coverage takes effect. By choosing to retain risk, the entity is essentially making a calculated decision to handle potential loss that falls within the scope of their financial ability to absorb.

This approach is common among businesses and individuals who prefer to keep insurance costs lower, as retaining some risk can reduce premiums. It reflects a philosophical choice to embrace certain risks in pursuit of cost savings or strategic objectives, acknowledging that complete risk elimination is usually impractical or impossible. In contrast, the other options—eliminating risks entirely, grasping future losses without active management, and sharing losses—do not encapsulate the concept of retention as it pertains to managing risk.