Retention

In insurance, retention refers to the portion of risk that an individual or business keeps for themselves, rather than transferring it to an insurance company. It’s the amount of potential loss that they are willing to absorb on their own.

Here are some key aspects of retention

• Risk Management Technique: Retention is a risk management technique used when the potential loss is small, the cost of insurance is high, or the risk is considered manageable.
• Forms of Retention: Retention can take various forms, including:
• Deductibles: The amount the policyholder pays out-of-pocket before the insurance coverage kicks in.
• Self-insurance: Setting aside funds to cover potential losses instead of purchasing insurance.
• Copayments: A fixed amount the policyholder pays for a covered service, such as a doctor’s visit.
• Non-insurance: Choosing not to purchase insurance for a particular risk.

Benefits

• Cost Savings: Retention can save money on insurance premiums by reducing the amount of coverage purchased.
• Control: It gives individuals and businesses more control over their risk management strategy.
• Incentive for Loss Prevention: Retention can encourage individuals and businesses to take steps to prevent losses, as they will be directly responsible for the financial consequences.

Drawbacks

• Financial Exposure: Retention exposes individuals and businesses to potential financial losses, which can be significant in case of large or unexpected events.
• Limited Resources: Small businesses or individuals may have limited resources to cover large losses.

Example

A homeowner with a $1,000 deductible on their homeowner’s insurance policy is retaining $1,000 of the risk of property damage. If a hailstorm causes $5,000 in damage to their roof, they will pay the first $1,000, and the insurance company will cover the remaining $4,000.

Retention is a common risk management strategy that can be used effectively in conjunction with insurance to balance the cost of coverage with the potential for financial loss.