A business owner decides to absorb smaller, predictable losses out of the company's own savings rather than buy insurance for them. This approach is an example of which risk management technique?

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.