What does risk retention refer to?

Risk retention refers to the practice of individuals or organizations choosing to accept the potential financial consequences of a risk instead of transferring it to an insurance company. When a person or entity decides not to purchase insurance and takes on full responsibility for any losses or liabilities that may arise, they are retaining the risk. This approach often signifies a conscious decision to self-insure, indicating that the individual or organization has assessed the risk and determined that either the potential costs are manageable or the likelihood of occurrence is low.

In contrast, transferring risk to an insurance company would involve purchasing a policy to cover potential losses, which is not aligned with the concept of retention. Government involvement in financial liabilities typically pertains to other forms of risk management, such as guarantees or bailouts, rather than direct retention. Lastly, sharing of risk with third parties would entail some form of risk transfer, which again contradicts the idea of retaining risk. Thus, the choice that accurately describes risk retention is the acceptance of full risk without purchasing insurance.