What does retention in risk management refer to?

Retention in risk management refers to the strategy of managing risk by accepting a certain level of loss or risk rather than transferring it to an insurance company or another party. When individuals or organizations choose to retain risk, they often do so by paying a deductible when a loss occurs, which is the portion they agree to cover out-of-pocket before insurance kicks in.

This approach can be effective for entities that want to minimize costs associated with insurance premiums or have sufficient financial resources to cover smaller losses. By opting to retain risk through mechanisms like deductibles, organizations maintain control over their risk management processes while still having a safety net provided by insurance for larger losses.

The other options address different aspects of risk management: pooling resources refers to how insurance companies distribute risk among many policyholders; transitioning risk to a third party involves transferring the potential burden of a risk to another entity, typically through insurance; and guaranteeing a future act relates to surety bonds, which ensure that contractual obligations will be fulfilled. However, these do not capture the essence of what retention means in risk management.