Complete Retention Guide: Definition, Strategies, and Examples

What Is Complete Retention?

Complete retention is a risk management strategy in which a business absorbs all potential losses rather than transferring risk through insurance. This approach can reduce costs by avoiding premiums, though it exposes the company to financial strain if losses are large. Businesses often consider complete retention when risks are limited, predictable, or relatively minor compared with overall resources.

Complete Retention in Risk Management

Complete retention means that no outside financing option is sought out. The business would be responsible for all costs and damages that occur as the result of a crisis, accident, or other unforeseen incidents that can result in losses.

Retention refers to the assumption of risk of loss or damages. This expresses how a party, usually a business, handles or manages its risk. When a business retains risk, they absorb it themselves, as opposed to transferring it to an insurer. A business or individual may assume this risk through deductibles or self-insurance, or by having no insurance at all.

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.

Examples and Alternatives

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.

In sum, there are a few ways to approach and treat risk in risk management. They include:

• Avoidance: This entails changing plans to eliminate a risk. This strategy is good for risks that could potentially have a significant impact on a business or project.
• Transfer: Applicable to projects with multiple parties. Not frequently used. Often includes insurance. Also known as "risk sharing," insurance policies effectively shift risk from the insured to the insurer.
• Mitigation: Limiting the impact of a risk so that if a problem occurs it will be easier to fix. This is the most common. Also known as "optimizing risk" or "reduction," hedging strategies are common forms of risk mitigation.
• Exploitation: Some risks are good, such as if a product is so popular there are not enough staff to keep up with sales. In such a case, the risk can be exploited by adding more sales staff.

The Bottom Line

Complete retention means a company accepts all potential losses from a risk as a form of self-insurance. This strategy works when losses can be managed internally, such as setting aside funds for minor incidents. Firms may also choose alternatives like partial retention with deductibles, risk transfer, avoidance, or mitigation depending on the situation.