Alabama Insurance Adjuster Practice Exam

In risk management, which technique involves accepting a certain level of loss?

1. Risk transfer

2. Risk retention

3. Risk avoidance

4. Risk reduction

The correct answer is: Risk retention

The technique of risk retention involves an organization or individual accepting the possibility of loss and choosing to bear the financial impact of that loss rather than transferring the risk to another party or taking preventative measures. This approach is often employed when the potential loss is deemed acceptable or manageable, and can apply to risks where the cost of transfer or avoidance would be greater than the risk itself. In practice, risk retention can manifest in various forms, such as self-insurance, where individuals or businesses set aside funds to cover potential losses. It can also be reflected in deductibles on insurance policies, which are amounts that the insured agrees to pay out-of-pocket before the insurance coverage kicks in. By retaining certain risks, entities can maintain control over their exposure and potentially save on costs that would otherwise go to insurance premiums or other risk management techniques. It is important to have a thorough understanding of the potential impacts and likelihood of risks when deciding to retain them, as this strategy requires careful consideration to ensure that the accepted losses do not outweigh the potential benefits.