What is active retention?

Active retention is the act of protecting against a loss by designating specific funds to pay for it. Active retention is the opposite practice of passive retention, in which no funds are set aside to cover an upcoming or estimated loss.

What is passive risk retention?

At its core, the idea behind passive retention is simple: it’s a term used to describe a situation when a organization unknowingly retains some level of risk, which ultimately leads to losses.

What are examples of risk retention?

An example of a risk that a company may be willing to retain could be damage to an outdoor metal roof over a shed. The company may instead decide to set aside funds for the eventual replacement of the shed’s roof rather than purchase an insurance policy to pay for its replacement.

What is risk retention in risk management?

Risk retention is the practice of setting up a self-insurance reserve fund to pay for losses as they occur, rather than shifting the risk to an insurer or using hedging instruments.

When should you use risk retention?

Business owners must make one important decision when choosing to retain risks, and that is if they can afford to pay up front for any loss experiences. Losses may be paid for out of current cash flows or may be covered by setting aside a reserve loss fund.

Which is better risk transfer or risk retention?

As a general rule, the only risks that should be retained are those that can lead to relatively small certain losses. Risk may be transferred to someone who is more willing to bear the risk. Transfer may be used to deal with both speculative and pure risk.