Retention in risk management is described as what?

Retention in risk management is described as what?

• A. Paying a premium to transfer risk
• B. Keeping losses within the organization and funding them
• C. Transferring risk to government
• D. Purchasing insurance at high deductible

Answer: (B)

Retention in risk management focuses on keeping losses inside the organization and funding them with internal resources. It’s a financing choice where the company chooses to bear the cost of losses itself, using reserves, retained earnings, or other internal funds rather than paying premiums to transfer that risk to another party. This approach is often used when the expected losses are small, the company has ample capital, or the cost of transferring the risk is higher than the potential losses. The other options describe scenarios where risk is moved outside the organization: paying a premium to transfer risk to an insurer, transferring risk to government programs, or buying insurance with a high deductible (which still involves a transfer of some risk to an insurer, though the policy requires the company to cover more loss itself up to the deductible). Retention uniquely emphasizes funding losses internally rather than shifting that financial burden to external parties.

Retention in risk management focuses on keeping losses inside the organization and funding them with internal resources. It’s a financing choice where the company chooses to bear the cost of losses itself, using reserves, retained earnings, or other internal funds rather than paying premiums to transfer that risk to another party. This approach is often used when the expected losses are small, the company has ample capital, or the cost of transferring the risk is higher than the potential losses.

The other options describe scenarios where risk is moved outside the organization: paying a premium to transfer risk to an insurer, transferring risk to government programs, or buying insurance with a high deductible (which still involves a transfer of some risk to an insurer, though the policy requires the company to cover more loss itself up to the deductible). Retention uniquely emphasizes funding losses internally rather than shifting that financial burden to external parties.