Retention
Retention refers to the practice of a business deciding to assume the risk of certain losses itself, rather than transferring that risk to an insurance company. In the context of insurance, it means that the business chooses to financially handle some potential losses without buying insurance coverage for them. This can involve setting aside funds to cover future losses instead of paying premiums to an insurer.
Example #1
A small business owner who decides to self-insure for minor property damage instead of purchasing a separate insurance policy.
Example #2
A company that chooses to retain a portion of their workers' compensation risks by covering certain medical expenses for employees out-of-pocket.
Misuse
Misuse of retention could happen when a business underestimates the potential costs of losses they choose to retain. For example, if a company decides to self-insure a significant liability without fully understanding the financial implications, they may face severe financial hardship in case of a large, unexpected loss. It is important to protect against this misuse by carefully assessing risks and having contingency plans in place.
Benefits
One of the primary benefits of retention is the potential cost savings for a business. By only purchasing insurance coverage for the most catastrophic risks and retaining smaller, more predictable losses, a company can reduce premium costs. Additionally, retention allows businesses to have more control over their risk management strategies and tailor them to their specific needs.
Conclusion
Understanding retention in insurance can empower businesses to make informed decisions about how they manage risk and allocate financial resources. By carefully balancing between retaining risks and transferring them through insurance, companies can protect their financial stability while optimizing their risk management approach.