What does risk retention mean in business?

It’s not just the insurance companies that are keeping a close eye on risk in your business. Your board of directors, management, and legal teams are also thinking about risk. Without a defined risk management policy, you are exposing your business to unnecessary risk.

If you don’t understand the different types of risks you face, how likely they are to happen, and what would happen if they did, you won’t be able to manage your risk effectively.

What's risk retention in business?

In order to make a profit, a business needs to manage and minimize risk One of the ways that a business can manage risk is by implementing a risk retention strategy. A risk retention strategy is a comprehensive plan that outlines how your business will mitigate your risks, such as how you will protect your assets and the steps you will take if something goes wrong.

What is risk retention mean?

For a business, risk retention refers to the amount of money it holds in reserve to cover its potential losses. To calculate it, you simply add up all the potential losses your company could possibly incur over the course of the year, multiplied by a certain percentage. The most common percentages are 5% and 10%.

What is the risk retention group?

At first glance, the idea of a risk retention group (RRG) may seem to conflict with your business goals and operations. The truth is, a risk management program is not found on the balance sheet, so it may seem like a redundant line item. However, the risk segment of your financials is a critical component of your annual budgeting and planning process. Having the right processes in place to mitigate the risks that affect your organization is critical to achieving and sustaining success.

What does risk retention mean for business?

The concept of risk retention is not new. In fact, it has been around for a long time and is utilized by many organizations when they need additional protection over what their policy covers. For instance, let’s say you are a commercial tenant and you lease a property for $100,000 per year. In the lease agreement, the tenant must pay a security deposit to cover the potential loss of rent in the event of an evacuation. The security deposit would be somewhere between $2,500