Risk Retention

Risk retention is one of the main ways to deal with risk, alongside avoidance, reduction and transfer. It is often the most cost-effective approach for small, frequent and predictable losses, where insurance would cost more than the losses themselves.

Retention can be planned or unplanned. Planned retention includes choosing high deductibles, self-insuring certain risks or using a captive insurer. Unplanned retention happens when a risk is not recognised or not insured, leaving the organisation to bear losses unexpectedly.

For example, a company with a large fleet of vehicles might choose to pay for minor accident damage itself, retaining the first 50,000 of each loss, while buying insurance for larger losses above that level. This reduces premiums significantly.

The term also has a specific meaning in securitization. After the 2008 financial crisis, rules in several jurisdictions required originators of securitizations to retain a portion of the credit risk, commonly 5%, so that they have an incentive to maintain good lending standards. This is sometimes called skin in the game.