What is the primary purpose of retention in insurance?

Retention in insurance refers to the practice of retaining a portion of the risk rather than transferring it entirely to an insurance company. The primary purpose of retention is to reduce expenses and increase cash flow by limiting the amount of insurance needed. When an individual or organization retains a portion of the risk, typically through a higher deductible or self-insured retention, they can lower their premium costs. This strategy allows the insured party to maintain greater control over certain risks while simultaneously managing cash flow effectively, as they only pay for coverage that exceeds their retention level.

The method of retention is particularly beneficial for businesses or individuals that have the financial capability to absorb minor losses without the need for an insurance claim, thus avoiding the triggering of policy limits for smaller claims. This approach not only fosters a potential reduction in total costs associated with insurance but also incentivizes the insured to manage risks more prudently.