PSI Ohio Insurance Practice Exam

What method of managing risk involves the planned assumption of risk through self-insurance?

1. Avoidance

2. Retention

3. Transfer

4. Reduction

The correct answer is: Retention

The method of managing risk that involves the planned assumption of risk through self-insurance is retention. This approach is used when an individual or organization chooses to retain the financial consequences of certain risks instead of transferring them to an insurance company. In self-insurance, the policyholder sets aside funds to cover potential losses, effectively accepting the risk themselves up to a certain threshold. Retention is a practical strategy for managing risks that are perceived as less likely to occur or are manageable within the entity's financial capabilities. It is often used by businesses that are able to predict and handle specific risks due to their size and experience, allowing them to save on premium costs while still having a plan to cover losses. This method emphasizes a calculated acceptance of risk rather than reliance on external insurance, making it suitable for certain scenarios where coverage might not be readily available or financially beneficial. The other methods, such as avoidance, transfer, and reduction, represent distinct types of risk management strategies that do not involve the assumption of risk in the same manner as retention. For example, avoidance means completely eliminating the risk, transfer involves passing the risk to another party (such as purchasing insurance), and reduction focuses on minimizing the impact or likelihood of a risk event occurring.