Risk retention

Deciding whether to self-insure or transfer liability to a third party


What is risk retention in insurance?

Risk retention in insurance is a strategic choice where you, as a business owner, personally shoulder the financial risk of potential losses instead of transferring it to an insurance company. This decision is often made when the cost of insurance exceeds the potential loss.

For example, it might be more cost-effective to manage shoplifting internally rather than filing claims for each incident.

Common methods of risk retention

With risk retention, you retain some or all of the risk instead of transferring it entirely to an insurance company. You can manage this in several ways, including:

  • Deductibles: You agree to pay a portion of the loss (the deductible) before the insurance coverage applies. This means you’re financially responsible for part of the loss.
  • Self-insurance: You choose to bear all the risk. Instead of paying premiums to an insurance company, you set aside money to cover potential losses. If a loss occurs, you cover it from this fund.
  • Internal funds for losses: You create a dedicated fund for losses. This ensures that claims are paid from a self-funded account and won’t impact your cash flow.

What to consider when deciding on risk retention

When deciding how much risk to retain versus transferring it to an insurer, you should carefully evaluate the potential losses you might face. If your business has a strong cash flow or cash reserves, self-insuring may be a viable option.

However, if a significant loss could jeopardize your company, transferring risk to an insurance company may make sense. Saving money on premiums may seem like a short-term gain, but it could prove shortsighted if a substantial loss puts the business at risk.

Pros and cons of risk retention for businesses

  • Ease of management
  • No premium costs
  • More control of claim resolution
  • More control of how to pay a claim
  • Avoid high deductible
  • Claims can disrupt cash flow
  • If you cannot resolve a risk quickly, it could result in lost revenue
  • Managing a loss can be overwhelming for a smaller company and impede daily business

Risk retention and insurance companies

You might be wondering how insurance companies manage their own risks. Insurance companies can also retain risk by choosing not to assume liability for certain insured items. If the risk outweighs the collected premiums, the company might share or transfer this risk to another insurer through reinsurance.

These third-party companies are often larger and have better capacity to absorb losses. They then take on the risk and manage any claims, while the original insurance company passes on the premium payments to them.

Why NEXT is your partner for business insurance

At NEXT Insurance, we understand the unique needs of small businesses. That’s why we offer affordable and customized business insurance to help you protect your business while keeping costs manageable.

Our user-friendly platform allows you to get a quote instantly, purchase insurance online, and access proof of insurance 24/7, so you can get back to what you do best.

Start a free instant quote with NEXT today.

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