A large employer that sets aside its own funds to pay employees' medical claims rather than purchasing insurance is using which risk management technique?

Why A is correct

Retention means keeping the financial consequences of a risk rather than shifting them to an insurer. A large employer with predictable claim patterns may choose to self-insure by funding its own medical claims. Retention can be deliberate and planned, as here, and is workable when the exposure is frequent enough to be predictable and not catastrophic in any single event.

Why the other options are wrong

• B) Avoidance means eliminating the risk-creating activity entirely, which the employer has not done.
• C) Transfer shifts the risk to an insurer; this employer is keeping the risk itself.
• D) Reduction lowers loss frequency or severity through prevention, not by funding losses internally.

Memory hook

Retention = self-pay the predictable. Transfer = hand the risk to an insurer.

Why A is correct

Retention (also called self-insurance) means the individual or business keeps the risk and pays for losses out of its own resources. It is appropriate for small, frequent, predictable losses that would not cause financial hardship. Transfer, by contrast, moves the risk to an insurer through the payment of a premium. Avoidance means refusing to engage in the activity, and reduction means lowering the chance or severity of loss through loss-control measures.

Why the other options are wrong

• B) Avoidance eliminates the risk by not engaging in the exposure at all, which is not what happens when losses are paid from savings.
• C) Reduction (loss control) lowers the frequency or severity of loss, such as installing sprinklers, rather than absorbing losses directly.
• D) Transfer shifts the financial risk to another party, such as an insurer; the owner here keeps the risk and pays the losses himself.

Memory hook

Retention = keep the risk and pay your own bills. It works for the small, the frequent, and the predictable.