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Term: Complete Retention

7 Feb 2015

DEFINITION OF ‘COMPLETE RETENTION’
A risk management technique in which a company facing a risk or risks decides to absorb any potential loss rather than transfer that risk to an insurer or other party. Complete retention means that no outside financing option is sought out.

INVESTOPEDIA EXPLAINS ‘COMPLETE RETENTION’
Deciding whether to use an insurer to cover potential losses or to fund losses itself requires a business or organization to estimate the extent of losses that it may face. A company may seek out a third-party, such as an insurer, to cover claims that may be substantial or unpredictable, such as for damages caused by floods, while also retaining some other types of risk for self-coverage.

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.

Rather than assume the responsibility for an entire risk, a company may choose a partial retention approach to the risks that it faces. In this case, the company will transfer part of the risk to an insurer in exchange for a premium, but may be responsible for a deductible. Alternatively, it may be responsible for any losses in excess of the coverage offered by an insurance policy. If the company believes that the risks are slight, it may choose a policy that has a high deductible, since that typically results in a lower premium and thus more cost savings.

A company may also accidentally assume complete retention if it does not identify that it faces a risk, and thus, does not know to pursue a risk transfer strategy. In this case, the company is considered uninsured by default, since it did not purchase insurance and did not know that it could.

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