Massachusetts State Life Insurance Practice Exam

What does the retention method of risk treatment entail?

1. Completely eliminating all risks

2. Foregoing all precautions against loss

3. Accepting and confronting risk as it occurs

4. Pooling risks with others

The correct answer is: Accepting and confronting risk as it occurs

The retention method of risk treatment involves accepting and confronting risk as it occurs. This approach acknowledges that some risks cannot be avoided entirely, and instead of trying to eliminate them or transfer them to another party, an individual or organization decides to retain those risks. This means they are prepared to deal with the consequences should the risks materialize, often because the potential loss or impact is considered manageable or is part of the overall risk management strategy. By retaining risk, an entity may also opt to set aside resources to cover potential losses instead of opting for expensive insurance or other transfer methods. This approach can lead to more efficient cost management and can be strategically beneficial in certain contexts where the likelihood of loss is low or where retaining control over the risk is preferred. In contrast, completely eliminating all risks is not feasible in many scenarios, and foreseeing all precautions against loss might lead to unnecessary expenses or restrictions. Pooling risks with others is more about risk sharing or transferring, which is distinct from the retention approach where the risks are actively managed by the entity itself.