Washington State Insurance Practice Exam

Which risk management method involves the planned assumption of risk by the insured through deductibles or self-insurance?

1. Avoidance

2. Retention

3. Transfer

4. Sharing

The correct answer is: Retention

The method of risk management that involves the planned assumption of risk by the insured through deductibles or self-insurance is known as retention. Under this approach, individuals or organizations consciously decide to take on part of the risk rather than transferring it entirely to an insurance company. This can be done through mechanisms like deductibles, where the insured pays a specified amount out of pocket before the insurance coverage kicks in, or by setting aside funds for potential losses in a self-insurance arrangement. Retention is often used by those who are able to absorb some level of loss without facing serious financial consequences. This method can lead to reduced premium costs, as the insured does not transfer the entirety of the risk to an insurer. It emphasizes personal accountability and financial planning regarding potential future losses. In contrast, avoidance seeks to eliminate risk altogether, transfer shifts the risk to another entity (like purchasing insurance), and sharing involves distributing risk among multiple parties. Each of these alternatives serves distinct strategic goals in risk management, but they do not incorporate the idea of assuming risk as retention does.