South Dakota Crop Insurance Practice Exam

What do deductibles and self-insurance represent in risk management?

1. Risk shifting

2. Risk retention

3. Risk avoidance

4. Risk pooling

The correct answer is: Risk retention

Deductibles and self-insurance are fundamental concepts in risk management that exemplify risk retention. When an individual or entity opts for a deductible, they agree to pay a certain amount towards a loss before their insurance coverage kicks in. This demonstrates a willingness to retain some financial responsibility for potential losses, rather than transferring all the risk to an insurance provider. Self-insurance takes the idea of risk retention further, as it involves setting aside funds to cover potential losses instead of purchasing a traditional insurance policy. By self-insuring, a business or individual assumes the risk of loss themselves, rather than shifting it to an insurance company. This approach shows a strategic choice to retain and manage specific risks while potentially lowering insurance premiums and gaining more control over the claims process. In this context, risk shifting refers to transferring risk to an insurer, risk avoidance involves taking steps to prevent risk from occurring altogether, and risk pooling is about spreading risk among a larger group or population to reduce the impact on any single entity. Therefore, the concepts of deductibles and self-insurance distinctly illustrate the practice of retaining risk within a risk management framework.