What is Complete Retention? Explained with Examples and Risk Management Strategies
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Summary:
Complete retention is a risk management strategy where a business chooses to absorb all potential losses rather than transferring the risk to an insurer. It’s a form of aggressive self-insurance, avoiding external financing options. This article delves into the concept, its implications, and alternatives, providing a comprehensive understanding of complete retention.
What is complete retention?
Complete retention is a risk management technique where a company opts to absorb potential losses rather than transferring the risk to an insurer. This aggressive form of self-insurance means the business takes full responsibility for all costs and damages resulting from unforeseen incidents.
Understanding complete retention
Complete retention involves accepting all potential risks without seeking outside financing. The business becomes responsible for costs and damages arising from crises, accidents, or other unpredictable events, eliminating the need for external risk transfer measures.
Retention in risk management
Retention, in this context, refers to assuming the risk of loss or damages without transferring it to an insurer. Businesses may handle this risk through deductibles, self-insurance, or by opting not to have insurance at all. The decision to retain risk requires estimating potential losses and deciding whether to seek external coverage.
Complete retention example and alternatives
An example of complete retention might involve a company choosing not to purchase insurance for potential damage to an outdoor metal roof over a shed. Instead, they set aside funds for the roof’s replacement. Alternatively, businesses may opt for partial retention, transferring some risk to an insurer while retaining responsibility for deductibles or losses beyond coverage.
Risk management approaches
Companies have various approaches to managing risk, including avoidance (changing plans to eliminate risk), transfer (shifting risk to insurers), mitigation (limiting the impact of risk), and exploitation (leveraging positive risks). Complete retention is a specific strategy with its own implications.
Frequently asked questions
What is complete retention in risk management?
Complete retention is a strategy where a business chooses to absorb all potential losses without transferring the risk to an insurer. It’s a form of aggressive self-insurance.
Are there alternatives to complete retention?
Yes, alternatives include partial retention, risk transfer through insurance, and other risk management approaches like avoidance, mitigation, and exploitation.
How does complete retention affect a company’s financial strategy?
Complete retention means relying on internal funds for potential losses, impacting the company’s financial resilience and risk-bearing capacity.
Key takeaways
- Complete retention is a risk management strategy where a business absorbs all potential losses.
- It offers control over risk management but requires substantial internal financial reserves.
- Alternatives include partial retention, risk transfer through insurance, and various risk management approaches.
- Companies need to carefully assess the potential impact on their financial strategy before opting for complete retention.
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