Risk Retention | Forms of Risk Retention | Techniques of Risk Retention

            In the earlier article we had been decided the risk mitigation strategies and also how to identify risk and select the appropriate risk mitigation strategy. Today in this article let us discuss one of the risk mitigation strategies called risk retention. In this article we will discuss about what is risk retention, various forms of risk retention and risk retention techniques.

Risk Retention

          Risk Retention strategy is one of the risk mitigation strategy which refers to retaining the risk by an individual or an organization and bearing the loss if occurred on his own. Risk Retention Strategy is adopted strategy when it is either uninsurable because of high risk or small and infrequent losses that can be better managed internally. This strategy is not used for high risk where there is a possibility high loss.

Forms of Risk Retention

          Various risk retention forms are as follows,

§  Planned Retention

§  Unplanned Retention

§  Funded Retention

§  Unfunded Retention

Now let us discuss each form of risk retention and try to understand various forms of risk retention,

§  Planned Retention:

Planned Retention refers risk retention form very an individual or firm plans to retain the risk consciously and deliberately after recognizing the risk.  

§  Unplanned Retention:

Unplanned Risk retention refers to risk retention form where in the individual or firm is not aware and hasn’t recognized the risk and thus the individual or firm is not aware of the loss also. This happens strategy comes into existence when accidental loss take place which is either not predicted or the risk hasn’t been recognized.

§  Funded Retention:

Funded risk retention is a risk retention form where in an individual or firm makes arrangements of the fund with an intention to bear the losses that take place in the future. In this type a reserve is created in order to fund the losses. This is one of the most common risk retention form used by various investors.

§  Unfunded Retention

Unfunded risk retention is a risk retention form where in an individual or firm doesn’t make any prearrangement of the funds for the risk and losses that may take place in the future and doesn’t even create a reserve for expected loss funding.

Techniques of Risk Retention

          In order to manage the risk in an effective way the techniques in risk retention are as follows,

§  Use of Available Cash

§  Establishment of the Loss Reserve

§  Use of Borrowed Funds

Now let us discuss each risk retention technique below,

§  Use of Available Cash:

In this technique the cash available to fund the loss is being used. This technique is usually used when unplanned and unfunded loss takes place with a view to nullify the effect by using the available cash.

§  Establishment of the Loss Reserve:

This technique is used in planned and funded risk retention form and a loss reserve is created with an objective to fund the expected or unexpected losses so that the losses don’t harm the financial condition of the individual or firm. The loss reserve fund is planned and regularly predefined amount is been contributed to loss reserve.

§  Use of Borrowed Funds

This is a technique where in an investor or firm borrows fund or raise funds from outside and then funds the losses. Here the individual or firm doesn’t uses its own funds to fund the loss when the loss occurred rather it borrows the fund and later pays it off.