What Is Complete Retention?
Complete retention is a risk management technique in which a company facing a risk or risks decides to absorb, or accept, any and all potential loss rather than transfer that risk to an insurer or other party. Complete retention is an aggressive form of self-insurance.
- Complete retention is a strategy whereby all potential risks are accepted by an entity without any form of risk transfer through hedging or insurance.
- Accepting risk can be seen as a form of self-insurance, where any and all risks that are not accepted, transferred, or avoided are said to be "retained."
- While complete retention avoids the costs associated with insurance or other risk transfer measures, it can prove disastrous if a severe event occurs that is uninsured.
Understanding Complete Retention
Complete retention means that no outside financing option is sought out. The business would be responsible for all costs and damages that occur as the result of a crisis, accident, or other unforeseen incidents that can result in losses.
Retention refers to the assumption of risk of loss or damages. This expresses how a party, usually a business, handles or manages its risk. When a business retains risk, they absorb it themselves, as opposed to transferring it to an insurer. A business or individual may assume this risk through deductibles or self-insurance, or by having no insurance at all.
Deciding whether to use an insurer to cover potential losses or to fund losses itself requires a business or organization to estimate the extent of losses that it may face. A company may seek out a third-party, such as an insurer, to cover claims that may be substantial or unpredictable, such as for damages caused by floods, while also retaining some other types of risk for self-coverage.
Complete Retention Example and Alternatives
An example of a risk that a company may be willing to retain could be damage to an outdoor metal roof over a shed. The company may instead decide to set aside funds for the eventual replacement of the shed’s roof rather than purchase an insurance policy to pay for its replacement.
Rather than assume the responsibility for an entire risk, a company may choose a partial retention approach to the risks that it faces. In this case, the company will transfer part of the risk to an insurer in exchange for a premium, but may be responsible for a deductible. Alternatively, it may be responsible for any losses in excess of the coverage offered by an insurance policy. If the company believes that the risks are slight, it may choose a policy that has a high deductible, since that typically results in a lower premium and thus more cost savings.
A company may also accidentally assume complete retention if it does not identify that it faces a risk, and thus, does not know to pursue a risk transfer strategy. In this case, the company is considered uninsured by default, since it did not purchase insurance and did not know that it could.
In sum, there are a few ways to approach and treat risk in risk management. They include:
- Avoidance: This entails changing plans to eliminate a risk. This strategy is good for risks that could potentially have a significant impact on a business or project.
- Transfer: Applicable to projects with multiple parties. Not frequently used. Often includes insurance. Also known as "risk sharing," insurance policies effectively shift risk from the insured to the insurer.
- Mitigation: Limiting the impact of a risk so that if a problem occurs it will be easier to fix. This is the most common. Also known as "optimizing risk" or "reduction," hedging strategies are common forms of risk mitigation.
- Exploitation: Some risks are good, such as if a product is so popular there are not enough staff to keep up with sales. In such a case, the risk can be exploited by adding more sales staff.