Risk management includes prevention and mitigation of possible losses, usually with a heavy emphasis on insurance. However, many companies choose risk retention for certain exposures where it makes sense. It’s important to consider these factors when choosing whether to insure against or retain a risk.
Cost of Insurance
Insurance premiums can be onerous for many companies, especially for certain risks that are high frequency but low severity. Rather than paying hefty premiums, it sometimes makes more sense to retain risks that would cost more in premium than it would garner in a payout. Sometimes, these retained risks can be ceded to a risk retention group instead.
There are certain losses that are predictable based on the business’s industry or geographic location. However, some risks that are so remote are better retained by the company instead of paying endless premiums that will likely never be recovered.
Regardless of the nature of the risk, it’s important to consider whether the company would have enough resources to cover the loss. If there is enough credit or capital to fund the cost to repair or replace damaged facilities or equipment, retaining the usually makes sense.
While paying for losses directly is cheaper than insurance, it also means investors must be willing to tolerate the level of risk. Insuring against a risk provides a level of stability that risk retention does not.
Risk management is not a one-size-fits-all prospect. Careful considerations should be made for all risks with solutions applied accordingly.