Texas General Lines — Property and CasualtyGeneral InsuranceMedium
A large corporation wants to protect itself from potential financial losses due to natural disasters. Instead of purchasing insurance, the corporation establishes a self-funded reserve account specifically for covering these types of losses. What risk management technique is the corporation employing?
- ARisk Reduction
- BRisk Transfer
- CRisk Retention
- DRisk Avoidance
Show answer & explanationAnswer & explanation
Correct answer: C. Risk Retention
Establishing a self-funded reserve account means the corporation is accepting the financial responsibility for potential losses itself, which is the definition of risk retention.
Why the other options are wrong
- A. Risk reduction would involve implementing measures to minimize the impact of disasters, like building codes.
- B. Risk transfer would involve purchasing an insurance policy to shift the financial burden.
- D. Risk avoidance would mean not operating in areas prone to natural disasters.
Risk Retention
A risk management technique where an individual or entity consciously or unconsciously accepts the financial responsibility for a potential loss.
- Means paying for losses out of pocket.
- Can be intentional (self-insurance) or unintentional (uninsured).
- Often used for small, predictable losses or when insurance is too costly.
Memory trick: RETAINING risk means AVOIDING REDUCED TRANSFERS.