Risk Retention

Definition§

Risk retention is a method of self-insurance used by organizations or individuals to set aside a reserve fund specifically for offsetting unexpected financial claims. Unlike traditional insurance where risk is transferred to an insurer, risk retention involves the organization handling potential risks internally by maintaining sufficient reserves to cover any possible losses.

Examples§

1. Corporate Reserve Fund: A large corporation may choose to retain risk by creating a reserve fund to cover potential legal claims or product liabilities instead of purchasing liability insurance.
2. Healthcare Self-Insurance: A healthcare organization might retain risk by setting up a fund to manage the costs associated with medical malpractice claims rather than buying malpractice insurance.
3. Municipal Self-Insurance: A city or municipality might retain risk for public liability claims by maintaining a reserve fund instead of securing general liability insurance.

Frequently Asked Questions (FAQs)§

Q1: What is the primary advantage of risk retention?

• A1: The primary advantage of risk retention is cost savings. By not transferring risk to an insurance company, organizations can save on premium costs and have more control over their funds and loss prevention strategies.

Q2: When is risk retention most appropriate for an organization?

• A2: Risk retention is most appropriate when the potential losses are predictable and manageable, and when the cost of insurance premiums outweighs the potential losses. It’s also suitable when an organization has the financial stability and capacity to reserve sufficient funds.

Q3: What are the main risks associated with risk retention?

• A3: The main risks include potential underestimation of reserve requirements, liquidity issues if multiple claims occur simultaneously, and the possibility of incurring losses that exceed the reserved funds.

Related Terms§

• Self-Insurance: A form of risk management where an entity sets aside funds to cover potential losses rather than purchasing insurance from a third party.
• Contingency Fund: A reserve of money set aside to cover possible unforeseen future expenses or financial claims.

Online References§

• Investopedia - Self-Insurance
• Wikipedia - Risk Retention
• National Association of Insurance Commissioners (NAIC) - Risk Retention

Suggested Books for Further Studies§

1. “Principles of Risk Management and Insurance” by George E. Rejda & Michael McNamara
2. “Handbook of Risk and Insurance Strategies for Certified Public Risk Officers and other Water Professionals” by Frank Spellman
3. “Risk Management and Insurance” by Scott E. Harrington & Gregory R. Niehaus

Fundamentals of Risk Retention: Insurance Basics Quiz§

Thank you for exploring the concept of risk retention with us and testing your understanding through our engaging quiz questions. Keep expanding your knowledge in risk management and self-insurance strategies!