The intentional or planned acceptance to handle a specific type of risk and all potential losses “in-house” by an entity. Risk retention involves the assumption of a risk consciously retained by an entity rather than transferred to other market participants.

Risk retention depends on a host of “noninsurance” techniques (internal insurance techniques) including creation of reserves, deductibles, and loss-sensitive plans, etc. In other words, it involves a system whereby an entity sets aside an amount of its profits (or equity) to provide for any potential losses— that could otherwise be covered through acquirement of insurance policies from insurances firms. The funds that would usually be set aside for premium payments are otherwise added to a special fund for payment of actual losses incurred.