General Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 3/5
An exposure has a very low probability of occurring but, if it occurs, would wipe out a family's entire savings. Under standard risk management principles, this exposure should generally be:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Risk management matches technique to the frequency–severity profile of the exposure. A low-frequency, high-severity exposure is exactly what insurance is built for: it is unlikely to strike in any given year, so the premium is relatively small, but if it strikes, the financial blow would be catastrophic. Retention makes sense only for losses the insured can afford to absorb; catastrophic potential should be transferred through insurance.
Why the other options are wrong
- B) Low frequency does not make a catastrophic loss affordable to retain; one event could destroy the family's savings.
- C) Insurance routinely covers low-frequency, high-severity risks; that is one of its central purposes.
- D) Reduction lowers the odds but cannot reduce the chance of loss to zero; a residual catastrophic risk would remain.
Memory hook
Rare but ruinous = buy the policy. Frequent and cheap = pocket the premium and self-insure.