Toward an optimal risk retention strategy in high-risk industries: A case for Saudi cement firms

Abstract

This study investigates the optimal risk retention strategy for cement companies in the Kingdom of Saudi Arabia, focusing on the period from 2012 to 2024. Using a quantitative approach, we model the frequency and severity of pure risks faced by the industry, applying Poisson and Gamma distributions alongside compound loss modeling to estimate the Maximum Probable Yearly Aggregate Loss (MPY). The results indicate that the optimal risk retention level for Saudi cement firms is 29.4%, suggesting that a hybrid risk management strategy—combining self-insurance and commercial insurance—offers the most cost-effective solution. By retaining a portion of the risk and transferring the remainder to insurers, firms can optimize their risk financing costs while maintaining protection against catastrophic losses. This approach is consistent with recent studies, including those by Nocco and Stulz [1] and Foster [2] which highlight the value of combining self-insurance and market insurance to balance cost control and risk mitigation. Ultimately, this research provides actionable insights for risk managers in the cement industry, enabling them to adopt strategies that enhance financial resilience and operational continuity in the face of an increasingly complex risk landscape.