South Dakota Crop Insurance Practice Exam

In the context of risk management, what does risk retention mean?

1. Shifting the risk to another party

2. Accepting the possibility of loss through deductibles or self-insurance

3. Avoiding all forms of risk

4. Sharing the cost of loss with others

The correct answer is: Accepting the possibility of loss through deductibles or self-insurance

Risk retention refers to the strategy of accepting the possibility of loss rather than transferring that risk to another party. This approach often involves certain financial considerations, such as opting for deductibles in an insurance policy or choosing self-insurance, where an individual or a business decides to bear the risk instead of paying premiums to an insurer. By retaining risk, an entity demonstrates a level of confidence in its ability to manage losses and may find it more cost-effective in certain situations. This choice conveys that the individual or entity is fully aware of the potential risks involved and has constructed a plan for dealing with those risks should they materialize. It is a practical approach often used when the cost of premiums is high or when the risk of substantial losses is low, making it financially viable to absorb those risks directly.