What is the disadvantage of risk retention?

1. Lack of diversification: When a company retains risks, it bears the full financial impact of any losses that occur. This can lead to significant financial losses if the company experiences a major loss event.

2. Increased cost of capital: Because risk retention increases the company's financial risk, it can lead to an increased cost of capital. This is because investors will require a higher return on their investment to compensate them for the increased risk of loss.

3. Reduced flexibility: Risk retention can limit the company's flexibility to respond to changing circumstances. For example, if the company experiences a major loss, it may be unable to obtain additional financing to cover the loss or to invest in new opportunities.

4. Reputational damage: If the company experiences a major loss, its reputation could be damaged. This could make it difficult to attract new customers and partners, and it could also lead to legal action from affected stakeholders.

5. Loss of control: If the company retains risks, it may lose control over the management of those risks. For example, if the company outsources its risk management functions to a third party, it may not have sufficient oversight of those functions.