As proven by the pandemic, businesses must be ready for the unexpected. Astute business owners look for ways to operate more efficiently, trim operating costs and maintain profitability. Although risk management is a required operating expense, risk retention in insurance may help in reducing expenses.
Risk Retention Explained
Risk-retention is when a business decides not to purchase insurance and instead pays insurance claims out-of-pocket. Often a company determines that the cost of a particular insurance policy is more expensive than that of self-funding, also called self-insuring the risk. An example of this is a business that chooses to self-fund their health insurance instead of buying insurance from a health insurance company.
Managing Risk Exposure
Companies must understand their risk exposure and plan accordingly. Some types of losses are very costly, and a company cannot afford the upfront costs related to the expense. To mitigate this risk, many self-funded companies set up a reserve fund from which losses are paid as they are incurred. Another best practice is to include funding the reserve as part of the budgeting process. For companies that want to reduce exposure to high losses, a risk retention group is also an option.
As insurance costs continue to rise, risk retention is a strategy every business owner should consider as part of their risk management plan.