What does risk retention refer to?

Risk retention refers to the strategy where an individual or organization chooses to accept and absorb the risk of potential losses rather than transferring that risk to another party, such as an insurance company. By retaining risk, the entity acknowledges the possibility of loss and decides that it is financially prepared to handle those losses instead of relying on insurance coverage.

This approach is often adopted when the likelihood of a loss occurring is low or when the costs associated with transferring the risk (like insurance premiums) outweigh the potential financial impact of the loss itself. Organizations may set aside reserves or self-insure to manage financial impacts that could arise, embodying the concept of risk retention effectively.

The other choices, while related to risk management, describe different strategies: transferring risks to an insurance company involves shifting the financial burden of risks and mitigating risks through investment implies active measures to prevent losses rather than absorbing them after they occur. Lastly, eliminating risk through insurance is not feasible since insurance cannot remove all potential risks, but rather addresses the financial consequences of those risks.