A business owner selects a high deductible on a property policy so that small losses are paid out of pocket and only large losses are insured. This approach to handling risk is called:

Why C is correct

Using a deductible and absorbing smaller losses out of pocket is retention: the business keeps responsibility for a certain level of loss and relies on insurance only for larger losses. Retention can be active, as when a deductible is deliberately chosen to reduce premium, or passive, as when a person simply fails to insure a risk and must absorb any loss that occurs. Retention is common because it lowers premiums while the insured deliberately accepts a controlled amount of risk. The deductible is a textbook example of planned retention.

Why the other options are wrong

• A) Avoidance would mean refusing to engage in the activity that creates the risk at all. The owner continues the business and simply absorbs small losses, so the risk is not avoided. The owner did not stop the activity; they kept operating and chose to absorb smaller losses, which is the opposite of avoidance.
• B) Sharing spreads the risk among many parties, such as a group of businesses pooling funds together. One owner keeping a deductible does not share risk with anyone. Sharing spreads risk among a group, but a single deductible is borne entirely by this one owner.
• D) Transfer moves the entire risk to an insurer. A deductible keeps part of the loss with the insured, so the risk is partly retained rather than fully transferred. Only the large losses are transferred to the insurer; the small losses stay with the insured, which is retention by design.

Memory hook

A deductible is planned retention: you eat small losses so the insurer only sees big ones.