What does the method of retention entail in risk management?

The method of retention in risk management involves accepting the risk without seeking to mitigate or transfer it to another party. This means that an organization or individual acknowledges the potential consequences of a particular risk and decides to bear the financial impact if the risk materializes.

Choosing this method typically suggests that the costs of implementing preventive measures or transferring the risk (like purchasing insurance) may outweigh the potential benefits. It reflects a strategic decision where the entity feels comfortable with the level of risk involved, often because they believe that the risk is manageable or that the likelihood of occurrence is low.

In practical terms, retention can serve as an effective approach for risks that are minor or for which the costs of insurance exceed the potential losses. To exercise retention effectively, stakeholders often need to have contingency plans in place should the risk occur, enabling them to respond adequately to any negative outcomes.