South Dakota Crop Insurance Practice Exam

Which scenario best illustrates the concept of risk retention?

1. A business chooses to forgo certain insurance policies

2. A company increasing its insurance premiums annually

3. An individual purchasing multiple insurance policies

4. A firm relying on government assistance for losses

The correct answer is: A business chooses to forgo certain insurance policies

The concept of risk retention refers to the practice of a business or individual deciding to bear the financial consequences of certain risks rather than transferring that risk to an insurance provider. When a business chooses to forgo certain insurance policies, it is opting to accept the potential financial loss that could arise from those uncovered risks. This decision signifies that the business is willing to retain the risk, rather than pay for insurance to mitigate it. In contrast, choosing to increase insurance premiums, purchasing multiple policies, or relying on government assistance all represent different approaches to managing risk rather than retaining it. Increasing insurance premiums typically indicates that a company is looking to secure additional coverage or adjust for higher perceived risks, while purchasing multiple policies is a strategy aimed at maximizing coverage and minimizing potential financial losses. Similarly, relying on government assistance for losses shifts the burden of risk management away from the entity and onto the government. Thus, option A accurately depicts risk retention as the intentional decision to accept certain risks without insurance coverage.