In relation to insurance policies, what does 'retention' mean?

Retention in the context of insurance policies refers to the practice of accepting the risk and covering losses personally. This means that an individual or organization chooses to bear a portion of the risk rather than transferring it entirely to an insurance company. By retaining risk, the insured becomes responsible for any losses that occur up to a certain limit before insurance coverage applies. This approach can be used strategically to manage costs or to handle risks that the insured feels confident in managing without external assistance.

In contrast, passing the risk to another party typically involves transferring it to an insurance company through a policy, which is not aligned with the concept of retention. Reducing exposure to loss can involve mitigation strategies but doesn’t necessarily imply acceptance of risk. Lastly, eliminating risks altogether is often impractical since risks are inherent in many aspects of life and business; therefore, complete elimination is not a realistic option. The focus of retention is on acknowledging the risk and deciding to manage it independently.