What does the term “risk retention” imply?

The term “risk retention” refers to the strategy where an individual or organization chooses to accept the potential financial consequences associated with a particular risk rather than transferring that risk to an insurance provider. This approach can occur for various reasons, including the belief that the probability of the risk occurring is low, the cost of transferring the risk (e.g., through policy premiums) is not justified, or the entity has sufficient financial capacity to absorb potential losses.

In essence, when a party opts for risk retention, they are recognizing the risk and deciding to manage and absorb it internally, possibly by setting aside funds to cover possible losses. This strategy can be a deliberate choice in risk management, fostering a proactive approach to handling uncertainties rather than relying on external insurance solutions.

The other options address different aspects of risk management but do not capture the essence of “risk retention.” For instance, purchasing additional coverage pertains to risk transfer rather than retention, maintaining certain coverage levels relates to compliance requirements, and reporting risks to an insurer is about managing the insurance relationship rather than retaining the risk itself. Therefore, the focus on accepting and managing risks internally defines the correct understanding of risk retention.